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OUTLINES 
OF SOCIAL 
ECONOMICS 



BY 



GEORGE GUNTON 

AUTHOR OF "TRUSTS AND THE PUBLIC," "WEALTH AND 
PROGRESS," "PRINCIPLES OF SOCIAL ECONOMICS," ETC. 

AND 

HAYES ROBBI NS 

DEAN OF THE INSTITUTE OF SOCIAL ECONOMICS 




NEW YORK 
D. APPLETON AND COMPANY 

1900 



/4001 




Library of Cor;.: rose 




Two Copies Re m ved 




NOV 13 1900 




Copyrignt cmiry 


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SECOND COPY 

Delivered to 


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ORDER DIVISION 




NOV 171900 





Copyright, 1900 
By George Gunton and Hayes Robbins 



PREFACE. 

This volume is especially adapted for study clubs, lit- 
erary and debating societies, and high schools. It may be 
used independently or, if desired, supplemented with 
Gunton's "Principles of Social Economics" chiefly, and 
other works to which reference is frequently made. 

It is believed that the method of arrangement will be 
found very practical. Dividing the subject into twenty- 
four distinct lessons, while it does not forbid a different 
division when circumstances may require it, as in high 
school classes perhaps, makes it peculiarly well suited for 
clubs and societies holding weekly or bi-weekly meetings. 
By covering two topics each time, a club holding fort- 
nightly meetings would complete the course in six 
months; so that this volume is a very convenient basis 
for a winter's work. School classes, which must make 
their work conform to the division -$f time by "terms," 
can easily subdivide or group these lessons according 
to their requirements. 

It should be clearly understood that the present volume 
is entirely complete in itself, and may be used without 
reference to supplementary text-books or other litera- 
ture. At the same time, for the sake of those who 
wish to go more deeply into the subject, references have 
been given in connection with each lesson to appropriate 
chapters and sections in Gunton's "Principles of Social 
Economics" and various historical and economic works. 

iii 



iv PREFACE 

To each lesson is appended a number of brief extracts 
from some of the suggested readings, and a series of 
questions on the topic, intended either for class work or 
in preparing programs for club meetings. 

Special attention is called to the extracts from sug- 
gested readings. These throw interesting and helpful 
side-lights on the study at every step, besides indicating 
the views held by various economists and historians of 
prominent reputation. 

A bibliography, giving the prices and publishers of 
every book quoted or referred to for collateral reading, 
appears as an appendix. 

There can be no more important group of subjects for 
study by young men and women throughout this coun- 
try, whether in school or out, than those treated in this 
volume. They deal with problems which lie at the root 
of intelligent, useful, American citizenship. Therefore, 
the constant effort in preparing this book has been to treat 
each topic in a clear and obvious fashion with familiar 
illustrations so that every step may be readily under- 
stood. Especially, the aim has been to give such practical 
applications of the laws and principles brought out that 
the reader will complete his study with a real "grip" on 
the meaning and merits of our increasingly acute eco- 
nomic, social, civil and municipal problems. This under- 
standing is far more important than to know the techni- 
cal details of government administration or the mechani- 
cal working of our political system. It is even more im- 
portant to young American citizens to-day than the schol- 
arship implied in a college degree. In fact, the safety 
and success of our free democratic institutions depend 
upon the. education and good sense of the people on the 
great industrial and social questions which underlie and 
determine our opinions and action as citizens. 



CONTENTS 



CHAPTER PAGE 

I. Meaning and Scope of Social Economics . . i 
II. How Industrial Life Affects Social Pro- 
gress 8 

III. Wealth 17 

IV. Production of Wealth 24 

V. Causes of Production 29 

VI. Factors and Methods of Production 36 

VII. Factors and Methods of Production (Con) 47 

VIII. Consumption of Wealth 55 

IX. Value or Price 62 

X. Cost of Production 70 

XL Distribution of Wealth 81 

XII. Wages S6 

XIII. Wages (Continued) 94 

XIV. Rent 105 

XV. Interest 112 

XVI. Profits 119 

XVII. Socialism 128 

XVIII. Socialism (Continued) 139 

XIX. The Single Tax 154 

XX. Cooperation and Profit-sharing 166 

XXI. Labor Organizations 176 

XXII. Labor Organizations (Continued) 185 

XXIII. Panics and Depressions 193 

XXIV. Are We Really Progressing ? 200 



CHAPTER I. 

MEANING AND SCOPE OF SOCIAL ECONOMICS. 

i. Early fleaning of Economics. In entering upon 
the study of social economics it is necessary to have 
definite idea as to the meaning and scope of the sub- 
ject ; including, first, the ground it covers ; second, its 
practical usefulness ; third, the point of view from which 
it should be considered. 

The word economics was first used by Aristotle, who 
meant the economics of the household, because in that 
early, patriarchal stage of society the family was the real 
social group. So that, economics was the science of 
domestic economy. Later, with the development of po- 
litical institutions, economics was used as applying to 
the state, or the economies of government, and hence 
took on the name "political economy" as distinguished 
from household economy. 

Political economy was really intended to convey the 
idea of economy in the administration of government, 
that is, in the collection and expenditure of public reve- 
nues. This was the idea of Adam Smith, the so-called 
"Father of Political Economy," who published the first 
great work on economics, "The Wealth of Nations," in 
1776. 

2. Fiodern " Social' ' Economics. With the de- 
velopment of industry and progress of civilization during 
the. nineteenth century the subject has expanded and 
now includes not merely the economy in public revenues 



2 OUTLINES OF SOCIAL ECONOMICS 

but the economy of the production and distribution of 
wealth, and, finally, everything which affects the indus- 
trial and social welfare of the community. In this way 
it has outgrown the limits of the old name, political econ- 
omy, and has really become the science of "social" eco- 
nomics. 

3. What It Includes. Social economics, then, in- 
cludes all questions which affect the industrial and social 
welfare of the people. Politics is different from social 
economics, but depends upon it. 

Politics is public action. It is the public expression of 
the wishes or policies of the people, but these wishes and 
policies are usually based upon economic considerations. 
Economics is in reality the foundation of politics. 

Thus, for instance, whether it is the better statesman- 
ship to annex far-away islands or keep our hands off, 
to have a protective tariff or free trade, to have bimetal- 
ism or the gold standard, to have an eight-hour working 
day in factories or permit them to run as long as their 
owners may decide, to regulate the employment of wom- 
en and children or leave it entirely to competition, to 
have the government own the railroads and telegraphs 
or let them remain in private hands, to allow sweatshops 
in our large cities to continue or to suppress them by 
law, — these and a multitude of similar questions are 
properly political issues, but the wisdom of our decision 
regarding each of them depends upon understanding 
their effect on the daily life, welfare, conditions and char- 
acter of the people, and this knowledge is what social 
economics aims to give. 

Therefore, social economics is at the very basis of 
intelligent, useful citizenship, and to understand it is 
indispensable to good government where the people rule, 
as under democracy. 



MEANING AND SCOPE OF SOCIAL ECONOMICS 3 

4. flany=Sided Questions. But the questions that 
arise in social economics are not always simple and easy 
to understand. Frequently they seem complex and puz- 
zling. There are always seemingly two sides to every 
question; as, for example, a labor strike. The laborer 
demands higher wages and shorter hours, because these 
will improve his condition. The employer sees it in an- 
other light. He objects, because the higher wages and 
shorter working day will increase the cost of running his 
establishment and for a time at least make it more diffi- 
cult to do business. So, too, when the legislature is 
asked to suppress sweatshops, it is urged to do so in the 
interest of humanity, health and decent industrial condi- 
tions. But, on the other side, it is urged that the poor 
people who work in these tenement houses, sweating and 
sweltering during sixteen or more hours a day for a mere 
pittance, will be deprived of the means of getting even 
that scanty livelihood if the law forbids sweatshops. We 
meet these differences of view on every hand. 

5. Right Point of View. Therefore, it is neces- 
sary first of all to have a correct point of view from 
which to see these matters. Politics can never furnish 
this point of view. We must get it from social economics. 
The object of all government is the welfare and progress 
of the people. Therefore, the welfare of the people is the 
point of view from which all industrial and social prob- 
lems should be decided. To go one step farther, it may 
be said that the welfare of the public is best reflected in 
the welfare of the great wage-earning class, and their 
welfare is indicated in general by the amount of wealth 
and comfort and advantages of higher civilization that 
can be obtained for a day's work. Wealth of itself is of 
no account unless it is consumed and broadens the civili- 
zation and happiness of the community. 



4 OUTLINES OF SOCIAL ECONOMICS 

6. The Great Test of a Public Policy. The real 
question to ask, therefore, in considering the majority of 
industrial or political propositions, is, how will it affect 
the opportunities and income of the laboring or wage- 
earning class? If the measure will tend directly or indi- 
rectly to improve their opportunities and increase their 
income, it will almost always increase the prosperity and 
improve the character of the whole community. What- 
ever helps the income of the laborers sooner or later pro- 
motes the possibility of profits in business and prosperity 
for all other classes. Indeed, the expenditures of the 
wage and salary earners furnish much the larger part 
of the market for the products of industry. 

There are two things which really indicate progress 
and improvement to the working class. One of these is 
a gradual cheapening of the necessaries, conveniences 
and comforts of life; the other is an increase in wages, 
without any lengthening of the working day. Whatever 
will promote either of these movements, by proper eco- 
nomic means, will promote the progress of society tow- 
ards a higher and better civilization. Industrial pros- 
perity is the soil in which all the superior phases of social 
life grow. Moral improvement, social culture, intellectual 
advancement, justice and integrity, broad altruism, and 
a high conception of human life, extending throughout 
the community generally, have their root in the subsoil 
of industrial welfare. 

7. Definition. Consequently, the laws and condi- 
tions which govern industrial welfare are at the root of 
progress and improvement. Social economics deals with 
these laws and conditions. It is the science which treats 
of man as a producer and consumer of wealth. 



MEANING AND SCOPE OF SOCIAL ECONOMICS 5 
SUGGESTED READING. 

In "Principles of Social Economics," the Preface and 
Chapters I. and II. of Part I.; discussing social progress 
and the law of social progress. 

Additional References. Address of Nicholas Murray 
Butler, Ph.D., before the graduating class of the Univer- 
sity of Michigan, June 22, 1899, on "The Education of 
Public Opinion." 

In Alfred Marshall's "Economics of Industry," Chap- 
ters I., IV., and V. of Book I. ; defining economics, trac- 
ing the growth of economic science and showing its 
scope. 

In Arthur T. Hadley's "Economics," Chapter I., on 
"Public and Private Wealth," including a sketch of 
economic science and pointing out standards of public 
welfare. 

In "My Young Man," by Rev. Louis Albert Banks, 
D.D., Chapter IX., on "My Young Man as a Citizen." 

EXTRACTS FROM READINGS. 

Good and Bad Citizens. "The political vitality and in- 
tegrity of a modern state must rest, in the last instance, 
upon the character and clearness of the political opinions 
held by men who are without official station. No admin- 
istrative vigor and no> legislative wisdom can long sur- 
vive in the vacuum of public ignorance and indifference. 
A supporting body of opinion is essential to the conduct 
of legislative or administrative policy, and a serious and 
high-principled opposition is necessary to prevent its 
exaggeration and abuse. . . . 

"Burke pointed straight at the typical bad citizen when 
he described those 'who think their innoxious indolence 
their security.' The man who submits to public imposi- 
tion to save trouble or trifling expense, or who pays to 



6 OUTLINES OF SOCIAL ECONOMICS 

be let alone/ or who, priding himself upon his integrity 
and business success, affects to 'despise politics/ is con- 
tributing his mite to the degradation of government and 
to the tearing down of the structure so laboriously and 
so painfully builded by the fathers. . . . 

"Are you politically alert? Are you politically honest? 
If not, you are a bad citizen and a corrupter, however 
innocent, of public opinion. If so, the standard which 
you set is a high one, worthy of imitation." — From ad- 
dress by Nicholas Murray Butler on "The Education of 
Public Opinion." 

Duty of Young Men. "The individual citizen has no 
right to be indifferent to the problems of citizenship. If 
this is true, then it is the duty evidently of every young 
man to look well to his own education in citizenship. A 
man ought to count himself ignorant and uneducated 
who does not have on his tongue's end a clear analysis of 
all the general conditions of the government under which 
he lives. ... I urge upon young men as a most 
solemn duty that they read books on political economy 
and on the functions of government, those comparing 
different forms of government, and especially those dis- 
cussing questions of municipal government. . . . 
An hour a day devoted to such subjects for the next year 
would make any young man a bright, wide-awake, well- 
informed citizen, capable of thinking about and discuss- 
ing the public issues of the day with intelligence, and able 
to find his way through the mists and haze of politics to 
sensible decisions. The country suffers terribly in its 
government because a great many of the best class of 
citizens, so far as reliability and character are concerned, 
fail to take that interest in politics, and in the conduct 
of the government, which they should." — From Rev. L. 
A. Banks' "My Young Man," Chapter IX. 



MEANING AND SCOPE OF SOCIAL ECONOMICS 



QUESTIONS FOR REVIEW OR DEBATE, 
i. What was the early meaning of "economics" and "political 



economy 



?» 



2. Who was Adam Smith? What was his great economic 

work? 

3. What broader aspect has economics gradually taken on? 

4. How does social economics differ from politics? 

5. What kinds of subjects and questions are included in social 

economics? 

6. What is the great object of governments? 

7. On what class of people does the welfare of the community 

chiefly depend? 

8. How is the welfare of this class determined? 

9. What is the great test to apply to proposed reforms or public 

policies? 

10. What two movements or tendencies are necessary to the 

progress of the wage-earning class? 

11. What is social economics? 



CHAPTER II. 

HOW INDUSTRIAL LIFE AFFECTS SOCIAL PROGRESS. 

8. What Progress Is. We are accustomed to talk of 
progress as if everybody understood it, whereas few peo- 
ple have any clear idea of what progress really is. How 
shall we define it, then, so as to know it when we see it ? 
Herbert Spencer has well said that progress is change, 
but all change is not progress. Then progress must be a 
change in a certain direction. Progress in a plant or ani- 
mals is a change of structure or formation towards a 
greater variety of parts or features, and a greater sub- 
division of special activities or "functions/' 

This is true also of communities or races or nations of 
human beings. Progress is a change towards more com- 
plex relations and a larger variety of interests and ac- 
tivities. For example, Wild tribes of savages probably- 
represent the earliest form of society, meaning by "so- 
ciety" the human race associated together in groups, as 
communities, tribes, nations, et cetera. Among these wild 
tribes is very little variation in the habits, customs and 
duties of the people. Hunting and fishing and fighting 
for protection are practically the only tasks, and every- 
body does about the same things. In his "Origin of Civ- 
ilization," on the authority of the greatest investigators, 
Sir John Lubbock tells us that in some of the simplest 
tribes even family life does not exist at all. 

From this to our present state of civilization society 
has passed through numberless changes, towards greater 

8 



INDUSTRIAL LIFE AND SOCIAL PROGRESS 9 

variety of duties, leading to greater variety of action, 
ideas, tastes, habits, and qualities of character. In this 
process the intellect is sharpened, morals are developed, 
human sympathies expanded, and the social character of 
man elevated. 

In the earliest stage of society we generally find abso- 
lute despotism and chattel slavery. The members of the 
community must simply obey the despot. With the 
growth of variety in occupations, interests and expe- 
riences we find growth of intelligence, desires for new 
privileges, and assertion of new rights, until gradually 
society is transformed from a despotism to a state of 
political and religious freedom, education, wealth and so- 
cial refinement. Progress is the change by which this 
great revolution takes place. 

9. Cause of Progress. What is the cause of this 
progress? How does it arise? We shall see as we pro- 
ceed that all these great changes in industries and poli- 
tics and social life have their rise in the necessities and 
desires of the people. Despotism is overthrown and free 
government established by the expanding desires of the 
people. Nearly always these at first relate to industrial 
interests or rights. If we study into the real causes of 
great movements, like the American Revolution or the 
overthrow of the Stuarts in England, decline of the 
feudal system, or the winning of magna charta, we find at 
bottom industrial motives, or else social motives arising 
out of industrial interests. These were the moving 
causes. There is nothing very strange about this, because 
industrial life is the basis of all life. Getting a living is 
the first absolute necessity. 

10. Effects of Industrial Life. It is easy to see 
why, therefore, the character of the occupations and in- 
dustries of a people has everything to do with determin- 



IO OUTLINES OF SOCIAL ECONOMICS 

ing the kind of government and general civilization they 
possess. In simple pastoral life, for instance, where herd- 
ing and hunting were the chief modes of industry, the 
chief frequently claimed to rule by authority direct from 
a god; that is, the government was a "theocracy." The 
people would not recognize and obey their leaders and 
rulers without the force of a superstition like this to con- 
trol them. 

But with the slow change from pastoral to agricultural 
life, where cultivation of the soil became the necessary 
means of getting a living, a variety of new experiences 
arose, A mere roving life became impossible. It was 
necessary after planting to care for the crops and wait 
for the harvest. This brought with it comparatively set- 
tled social relations, regular trade, usually by "barter," 
and more permanent homes. It also made it necessary 
that men should recognize some sort of a moral law. It 
ceased to be allowable to take whatever one saw. When 
one planted it was necessary that he should have the right 
and opportunity to reap. Therefore, protection to prop- 
erty, recognition of personal rights, and security of fam- 
ily life grew up largely with this new order of settled in- 
dustry. Consequently, with this era, while they usually 
had despotism, backed by some pretence of "divine 
right," still there was the beginning of regular govern- 
ment distinct from religion, recognition of civil laws, 
obedience to authority, protection of personal rights, and 
some crude semblance of justice. 

With the further progress from purely agricultural oc- 
cupations to the point where manufacture and commerce 
came in, still new variations in experience and interests 
developed. Simple as early manufacture was, it had 
far more individuality in it than had agriculture. The 
manufacture of clothing, furniture, military weapons, 



INDUSTRIAL LIFE AND SOCIAL PROGRESS II 

and so on, called for ingenuity, invention and skill. Ex- 
panding trade brought increased personal contact in busi- 
ness, and more frequent social intercourse, if only at the 
markets and fairs. Manufacture brought people to- 
gether in towns, partly for self-defence, partly for the 
convenience of trade. This clustering in towns in pur- 
suit of various industries gave people many common in- 
terests. 

ii. Early Towns and Rise of Liberty. The towns 
were the great strongholds of the people in the middle 
ages, against the barons, who constantly raided them for 
the sake of plunder. This very necessity of common de- 
fence against the barons compelled the citizens or 
"burghers," to organize municipal governments. Thus, 
some of these towns were practically little republics, in 
which each burgher had full political rights and shared 
fully in the government. It was under these influences 
and by the growing power and influence of the towns 
that the burgher or middle classes first gained entrance 
to the English parliament, and popular government be- 
gan. To be sure, this progress was slow, tedious and 
painful. At first it was scarcely observable, from cen- 
tury to century; but every important change in the di- 
rection of greater variety of industry and occupation was 
followed sooner or later by some advance in industrial, 
political, social or religious freedom. England led in 
this great movement; the continental countries were 
much more backward. 

12. The Industrial Revolution. In the eighteenth 
century, as a natural consequence of this progress, came 
a series of remarkable inventions in the great industry of 
cotton spinning and weaving; Hargreaves' spinning jen- 
ny in 1764, Arkwright's spinning frame in 1769, Cromp- 
ton's "mule" frame in 1779, and Cartwright's power loom 



12 OUTLINES OF SOCIAL ECONOMICS 

in 1785. During the same period (1769) James Watt 
patented the first steam engine, and this applied to cotton 
mill machinery gave us the beginning of the modern fac- 
tory system. 

This was practically a revolution in the character of 
industry. Factory methods supplanted the "home" or 
"domestic" system of hand labor. This created a whole 
series of new interests, new evils to be remedied, new ad- 
vantages to be enjoyed. It was followed by the great 
movements of the nineteenth century in England, for 
political and religious freedom, first for the middle class 
and then for the laboring class. England still has the 
remnants of a monarchy, but it remains only by suffer- 
ance and on good behavior. In reality, the English peo- 
ple have practical democracy. 

In this country, although we were largely agricultural 
up to the time of the Revolution, our people were the best 
product of centuries of English progress. Liberty came 
early, therefore, and our civilization has expanded along 
with our wonderful industrial growth. 

13. Summary. Briefly, then, it may be said that the 
social life and quality of a people is largely determined 
by the character of its occupations. Nations rise in civ- 
ilization, freedom and enlightenment in proportion as 
their industrial life is varied and expanding. Anything, 
therefore, which tends to increase the variety of industrial 
life may be considered favorable to progress, and any- 
thing which tends to put us back to simple and crude 
conditions of industry, or diminish the number of in- 
terests and duties, is certain to deaden the spirit of im- 
provement and restrict progress, perhaps entirely arrest 
it. 



INDUSTRIAL LIFE AND SOCIAL PROGRESS 1 3 

SUGGESTED READING. 

In "Principles of Social Economics," Chapters III. to 
VII. inclusive, of Part I. Two of these chapters are 
theoretical, dealing with the cause of social progress and 
giving proofs of the law of progress ; the other three are 
historical, describing the rise and fall of the medieval 
free cities and tracing the progress of political and re- 
ligious freedom, chiefly in England and America. 

Additional References. In Marshall's "Economics of 
Industry," Chapters II. and III. of Book I. ; on "The 
Growth of Free Industry and Enterprise," in early civili- 
zations, down through the middle ages, and under our 
modern factory system, pointing out the influence of 
climate, custom, etc. 

In Hadley's "Economics," Sections 29 to 45 inclusive, 
in Chapter II. ; describing primitive life, slavery, the be- 
ginning of private property, and emancipation. 

In Lubbock's "Origin of Civilization," Chapter I. ; 
Chapter III. as far as the bottom of page 85 ; and Chap- 
ter IX. ; describing the social conditions, superstitions, 
marriage customs, laws, etc., of savage tribes. 

In Henry T. Buckle's "History of Civilization in 
England," Chapter II. ; which is a marvelously fasci- 
nating and suggestive account of the "Influence Exer- 
cised by Physical Laws Over the Organization of Society 
and Over the Character of Individuals," although defec- 
tive in some of its economic reasoning. 

In H. de B. Gibbins' "Industrial History of England," 
Chapter II. of Period II. ; on "The Towns and the Gilds." 

EXTRACTS FROM READINGS. 

Savage Life. Speaking of the wild men in the in- 
terior of Borneo, Mr. Dalton says that they are found 
living 'absolutely in a state of nature, who neither culti- 



14 OUTLINES OF SOCIAL ECONOMICS 

vate the ground, nor live in huts; who neither eat rice 
nor salt, and who do not associate with each other, but 
rove about some woods, like wild beasts ; the sexes meet 
in the jungle, or the man carries away a woman from 
some campong. When the children are old enough to 
shift for themselves, they usually separate, neither one 
afterwards thinking of the other; at night they sleep 
under some large tree, the branches of which hang low. 
On these they fasten the children in a sort of swing; 
around the tree they make a fire to keep off the wild 
beasts and snakes, — they cover themselves with a piece 
of bark, and in this also they wrap their children; it is 
soft and warm, but will not keep out the rain. The poor 
creatures are looked upon and treated by the other Dyaks 
as wild beasts.' . . . 

"No savage is free. All over the world his daily life 
is regulated by a complicated and apparently most in- 
convenient set of customs (as forcible as laws), of quaint 
prohibitions and privileges ; the prohibitions as a general 
rule applying to the women, and the privileges to the 
men. 'To believe,' says Sir G. Grey, 'that man in a savage 
state is endowed with freedom, either of thought or ac- 
tion, is erroneous in the highest degree/ " — From Sir 
John Lubbock's "The Origin of Civilization," Chapters I. 
and IX. 

Early English Towns. "The inhabitants of the towns 
were of all classes of society. There was the noble who 
held the castle, or the abbot and monks in the monastery, 
with their retainers and personal dependents ; there were 
the busy merchants, active both in the management of 
their trade and of civic affairs; and there were artisans 
and master workmen in different crafts. There were free 
tenants, or tenants in socage, including all the burgesses, 
or burgage-tenants, as they were called; and there was 



INDUSTRIAL LIFE AND SOCIAL PROGRESS 1 5 

the lower class of villeins, which, however, always tended 
to rise into freemen as they were admitted into the gilds. 
To and fro went our forefathers in the quiet, quaint, 
narrow streets, or worked at some handicraft in their 
houses, or exposed their goods round the market-cross. 
And in those old streets and houses, in the town-mead 
and market-place, amid the murmur of the mill beside 
the stream, and the notes of the bell that sounded its 
summons to the crowded assembly of the town-mote, in 
merchant-gild and craft-gild was growing up that 
sturdy, industrial life, unheeded and unnoticed by knight 
or baron, that silently and surely was building up the 
slow structure of England's wealth and freedom." — From 
Gibbins' "Industrial History of England," Chapter II., 
Period II. 

How the Towns Bought Freeedom. "It is interesting 
to see what circumstances helped forward this emancipa- 
tion of the towns from the rights possessed by the nobles 
and the abbeys, or by the kings. The chief cause of the 
readiness of the nobles and kings to grant charters during 
this period (from the Conquest to Henry III.) was their 

lack of ready money They could not indulge 

their love of fighting, which in their eyes was their main 
duty, without money to pay for their fatal extravagances 
in this direction, and to get money they frequently parted 
with their manorial rights over the towns which had 
grown up on their estates. Especially was this the case 
when a noble, or king, was taken prisoner, and wanted 
the means of his ransom. . . . And the glories and 
cruelties of that savage age of so-called knightly chivalry, 
which has been idealized and gilded by romancers and 
history-mongers, with its tournaments and its torture- 
chambers, were paid for by that despised industrial pop- 
ulation of the towns and manors which contained the real 



l6 OUTLINES OF SOCIAL ECONOMICS 

life and wealth of medieval England." — From Gibbins 
"Industrial History of England," Chapter II., Period II. 

QUESTIONS FOR REVIEW OR DEBATE. 

i. What is the scientific meaning of "progress"? 

2. What is the great underlying cause of human progress? 

3. How were people governed under simple pastoral life? 

4. What changes in government and ethics came with agricul- 

tural life? 

5. What have been some of the great effects of the rise of 

manufactures and commerce? 

6. In the middle ages what part was played by the towns and 

free cities? 

7. Mention the great inventions that brought in the modern 

factory system, and name the inventors. 

8. In what ways did the factory system revolutionize industry? 

9. What country led the movement of industrial growth and 

free government down at least to the nineteenth century? 

10. How do you account for the more rapid progress of our 

own country, especially in political and religious freedom? 



CHAPTER III. 



WEALTH 



14. What Wealth Is. We have seen, in our brief his- 
torical review, that as people advanced in wealth and 
prosperity they acquired new rights and advantages, 
political freedom, and a higher state of general culture 
and civilization. In order to understand the reasons for 
this it is important to have a clear idea of the meaning 
of wealth. This is all the more important because there 
is a good deal of careless talk about wealth, as if exact- 
ness were of no special importance. Wealth is every- 
thing outside of and apart from man, which, by human 
effort, is made useful to man. 

15. Gifts of Nature Not Wealth. Every part of this 
definition is important, as we shall see. There are many 
things, for instance, that are useful to man but are not 
wealth; such as sunshine, air, gravitation, and wind. 
They are not wealth, because they are gratuitous, and do 
not require any human effort to make them useful. They 
should be described as free gifts of nature, never as 
wealth. Wealth requires some kind of human exertion. 

Natural resources not yet utilized, but which are capa- 
ble of being made useful to man by human effort, such 
as unoccupied land, virgin forests and undeveloped min- 
eral deposits, may be regarded as potential wealth. They 
are not actual wealth until some productive effort has 
been actually applied to them, but as potential wealth 

17 



1 8 OUTLINES OF SOCIAL ECONOMICS 

they may have value or command a price, due. to the an- 
ticipated possibility of producing wealth from them. 

16. Kinds of Wealth. In the next place, nothing 
should be called wealth which is not entirely distinct 
from man. To understand clearly the reason of this 
we should divide wealth, for convenience, into two 
classes, consumable wealth and productive wealth. By 
consumable wealth we mean all wealth which is directly 
used to satisfy desires, such as food, clothing, shelter, 
art, literature, music; in fact, everything which is used 
not as a means to a further end, but as the final means of 
satisfying some desire. This wealth directly ministers 
to human happiness. It serves the final end for which 
wealth is produced. Hence it is called consumable 
wealth. 

Productive wealth, or "capital," is wealth which is not 
used directly to satisfy final desires, but is used indirectly 
to aid in producing consumable wealth. Productive 
wealth includes everything used in the whole process of 
producing commodities for consumption — tools, ma- 
chinery, factories, railroads, steamships, etc. 

17. Capital is Distinct from flan. Since man him- 
self plays the most essential part in producing wealth, 
it is very easy to make the mistake of saying that man is 
capital ; or, as is more usual, that a man's muscle or skill 
or talent are his capital. For instance, Adam Smith 
spoke of the education and apprenticeship and training 
of a man as part of his capital. So careful an economist 
as John Stuart Mill said that the education and skill of 
a people may be included in the capital of the country. 

Except in a very narrow personal sense this is a grave 
error. It is a very confusing one, too. It blots out any 
sharp line of distinction between man and wealth, and 
it is very important to keep this distinction clear, be- 



WEALTH 19 

cause we have exactly the opposite kind of interest in 
man that we have, in wealth. Labor and natural personal 
faculties, as skill, strength, and genius, are human; they 
are a part of the individual person and cannot be sepa- 
rated from him. They are inseparable personal qualities, 
but wealth is material and capable of being transferred 
from one to another. Every addition to a man's capacity 
or expansion of his character is a growth of the man and 
not an increase of wealth. 

Capital is wealth used as a tool. Skill is not wealth 
used as a tool; it is personal quality, personal ability, an 
evidence of training and natural talent. When actively 
employed it is simply skill used in production, not wealth 
used in production. 

18. Importance of the Distinction. This distinction 
is more important than at first appears. The object of 
consumable wealth is to gratify human desires. The ob- 
ject of productive wealth (capital) is to aid man in 
producing consumable wealth. Both these uses of wealth 
are for the well-being of man ; one directly, the other in- 
directly. This means that wealth must be used, most of 
it used up in fact, for the sake of man, which in turn 
means that our progress, if we are to have any, depends 
upon wealth becoming cheaper and man becoming dearer. 
These are two opposite movements, and of course both of 
them cannot take place if man and wealth are the same 
thing. Anything that gives man more wealth for less 
labor, whether by higher wages, lower prices or shorter 
hours, or all three, promotes human progress. Thus 
wealth and man are unlike in their very nature, and hu- 
man welfare depends upon one being used for the sake 
of the other. 

19. Evil Effects of the Wrong View. The early 
economists failed to keep this distinction in mind, and 



20 OUTLINES OF SOCIAL ECONOMICS 

so fell into the habit of describing labor as a form of 
capital. This led directly to the idea that labor should 
be cheap. Everybody agreed that commodities should 
be cheap, and this required that they should be cheaply 
produced. Since capital (including labor) was the in- 
strument of production, of course labor must be cheap. 
This justified the. lowest possible wages and longest pos- 
sible hours of work and poorest factory conditions, and 
the employment of women and children ; whereas, if man 
and capital had been kept entirely distinct no such course 
could ever have been justified. Cheap production could 
have been sought through better machinery (capital), 
never through cheaper human labor. 

The more perfect human faculties become and the 
more important the service men render, the higher price 
they may and should command. Every such upward 
movement tends toward higher social life. On the other 
hand, the more perfect the commodities we consume be- 
come the lower their price should be, so that people can 
have more of them without working harder or longer, 
and thus get more happiness and opportunity for culture 
out of their efforts. 

20. Summary. Wealth, then, is everything outside of 
man, procured by human effort, which directly or indi- 
rectly satisfies human wants. Consumable wealth is 
everything which is directly used for this end. Capital 
is wealth which is used for the production of more 
wealth. But under no circumstances or conditions are 
human faculties and qualities to be considered as wealth. 
Capital is non-human and labor is human. Wealth exists 
for man, but not man for wealth. Wealth should be 
produced and used for man, but man should not be used 
for wealth. The mercury of human progress rises only 
when man is growing dearer and using more wealth, and 



WEALTH 2 I 

wealth is gowing cheaper and serving man more effec- 
tively and abundantly. 

SUGGESTED READING. 

In "Principles of Social Economics," Section I. of 
Chapter I., Part II.; on definitions of wealth and its es- 
sential characteristics. 

Additional References. In John B. Clark's "Philoso- 
phy of Wealth/' Chapter I. ; which points out very clearly 
the distinction between wealth and personal human 
qualities. 

EXTRACTS FROM READINGS. 

The Broader Meaning of Wealth. "Wealth, then, con- 
sists in the relative- weal-constituting elements in man's 
material environment. It is objective to the user, ma- 
terial, useful, and appropriable. Let us apply the term 
with logical consistency to whatever possesses these four 
essential attributes, and note the effect on the traditional 
conception of wealth. Mr. Mill and the orthodox school 
will be found to exclude from their classification things 
which possess these attributes, and to include some which 
do not. They recognize as wealth only those things 
which are sufficiently substantial and durable to con- 
stitute a more or less permanent possession, things which 
would appear on the inventory, if society were suddenly 
to cease producing and consuming, and apply itself, for, 
say, a month or two, to taking an account of stock. It is 
here maintained that durability is not an essential at- 
tribute of wealth. Durability is a factor of value, and 
determines, in so far, the measure of wealth in any par- 
ticular product. But products are of all degrees of dur- 
ability, and there is no ground for excluding any of them 
from the conception of wealth on the ground of this sim- 



22 OUTLINES OF SOCIAL ECONOMICS 

pie difference of degree. Even the school of writers re- 
ferred to would not hesitate to class the ices of the con- 
fectioner in the same category with the stone wall of the 
mason, though they are at opposite extremes in the scale 
of durability. They would, however, exclude music from 
the conception, on the ground of its insubstantial and 
perishable character. It is maintained in this discussion 
that, in that which constitutes wealth, there is no differ- 
ence other than one of degree between music and a stone 
wall. The difference in their durability is, indeed, one of 
the factors in their relative value ; but both alike possess 
the four essential attributes above specified; they are ob- 
jective and material products; they are useful and ap- 
propriable, and fall within the definition of wealth. 

"Having unduly limited their conception of wealth in 
one direction, the orthodox writers have unduly extended 
it in another. They have, for example, classed as wealth 
the acquired skill and the technical knowledge of the 
laborer. Personal attainments, as subjective and imma- 
terial, are excluded from the meaning of the term. They 
are not a possession ; that implies externality to the pos- 
sessor. They are what he is, not what he has. Popular 
thought and speech broadly distinguish the able man from 
the wealthy man. A man has a potential fortune, not an 
actual one, in his abilities. The term indicates a state of 
being able and implies a possibility — not an attained re- 
sult. Labor creates wealth, and acquired abilities are po- 
tential labor. They are to be regarded as the potentiality 
of the human factor of production, and it introduces an 
element of confusion into the science to class them with 
the completed product. If these considerations were not 
sufficient to settle the economic status of a man's subjec- 
tive qualities, it would, at least, suffice for that end to 
apply to them the test of the traditional definition itself, 



WEALTH 23 

in which 'exchangeable value' is made to be the essential 
attribute of wealth. In every exchange two commodities 
are alienated, and transferred to new ownership. Noth- 
ing can be subjected to this process which is an insepara- 
ble part of one man's being. . . . 

"If wealth-creating abilities are to be confounded with 
the product which results from exercising them, every 
power acquired by effort, involving, in practice, the whole 
man, will have to be classed as a commodity. The error 
is mentally confusing, and it is disastrous in its practical 
results. Man produces wealth and consumes it ; but man 
himself is always distinct from it." — From John B. 
Clark's "Philosophy of Wealth," Chapter I. 

QUESTIONS FOR REVIEW OR DEBATE. 

1. What is wealth? 

2. Name several things which are not wealth and explain why. 

3. What are the two great classes of wealth, and what is the 

usefulness of each? 

4. How did the mistake arise of confusing man with wealth? 

5. Should skill, strength, education, etc., be counted as capital? 

Give reasons for the answer. 

6. Why is it so important to make a clear distinction between 

man and capital? 

7. On what great opposite movements does progress depend? 

8. Describe some of the evil results of regarding labor as a 

form of capital? 



CHAPTER IV. 



PRODUCTION OF WEALTH. 



21. /leaning of Production. Production is such a 
simple and commonplace word that it seems hardly to 
need any explanation. The first thought is, why, every- 
body knows what production means, yet there is great 
misunderstanding and difference of opinion about it. If 
we have our idea of wealth clear and distinct we ought 
to have no trouble in deciding what kind of efforts are 
to be called production, since production is simply the 
process of creating and supplying wealth. 

22. Early Ideas of Production. In the early 
eighteenth century the leaders of political economy, such 
as it was, were the French "physiocrats." They taught 
that nothing was production which did not really bring 
something from the earth, like mining, agriculture and 
forestry. Manufacture and trade were not regarded as 
production. While these pursuits were rather useful they 
did not increase wealth. Adam Smith in his "Wealth of 
Nations" completely demolished this view and estab- 
lished the "mercantile-school" doctrine that manufacture 
and commerce are both productive ; that to take wool and 
convert it into clothing is production as much as to raise 
the sheep. 

But even Adam Smith did not consider that govern- 
ment officials, clergymen, teachers, scientists, musicians, 
literary men and soldiers were producers. They were 
consumers, but were what he called "non-productive con- 

24 



PRODUCTION OF WEALTH 25 

sumers." John Stuart Mill, who was the great ex- 
pounder and sustainer of Adam Smith, added soldiers, 
policemen, judges and jailers to the list of producers. He 
said they were producers because they were necessary to 
the security of production. A policeman is a producer 
because he is needed to stop the thief from running away 
with the product, or the incendiary from setting fire to it. 
Soldiers are producers because production could not be 
secure in any country if foreigners could invade by force 
and destroy property. 

But Mill thought that teachers and clergymen, actors, 
scientists, literary men and lecturers (which group in- 
cluded himself), et cetera, were not producers. He said 
they might be very useful but that the country was the 
poorer for having them. 

This idea of production has led to a great deal of con- 
fusion and class prejudice. The idea that anybody who 
does not by his labor directly increase the amount of 
marketable goods is not a producer, but is only what Mill 
calls an "unproductive consumer" by whose presence 
"society or mankind grow no richer . . . but poorer," 
has led to the idea that middlemen and professional men 
are parasites on society. This idea is partly responsible 
for the socialist claim that the laborers produce all the 
wealth, and hence, of course, that all wealth by right be- 
longs to them, and that for anybody else to share in it is 
robbery. 

This shows what serious mistakes can arise out of a 
wrong conception of important terms. Adam Smith 
could see that the physiocrats were wrong in denying that 
manufacturers and merchants are producers. John Stuart 
Mill could see that Adam Smith was wrong in denying 
that policemen and soldiers are producers, but he could 



26 OUTLINES OF SOCIAL ECONOMICS 

not see that he himself was wrong in denying that teach- 
ers, clergymen, artists and musicians are producers. 

23. The Broader View. The broader and altogether 
truer view is that everything is production which directly 
or indirectly aids in creating and supplying wealth. 

So far as the article itself is concerned, a barrel of flour 
is as completely produced before it leaves the flour mills 
of Minnesota as when it gets to the pantry of the con- 
sumer, but all the handling, transporting, storing and 
delivering is a part of its production. Production is not 
complete until the wealth is finally delivered into the 
hands of the consumer. Therefore, all that takes place 
between Minnesota and the millions of consumers' homes 
is as much production as was the plowing of the field or 
the grinding of the wheat. So that, middlemen are pro- 
ducers just so long as they are needed in this process. 
When they are supplanted by a better organization of 
industries they cease to be needed and are dispensed with, 
because they are no longer producers. 

From this point of view, also, teachers, clergymen, 
lawyers, singers, in fact, all professional people whose 
efforts develop and refine the character and tastes of the 
community, promote justice and security, and stimulate 
variety of wholesome wants and activities, are producers, 
because indirectly they stimulate production, increase its 
safety and cause the making of a finer and more useful 
quality of products. Their service, therefore, is not un- 
productive, but is really productive. 

When we understand that everything is production 
which is necessary to make consumption possible, the 
mistaken idea about middlemen being parasites and rob-, 
bers disappears. Going further, when we broaden the 
idea of production to include everything which stimulates 
and increases production, then it is perfectly clear that 



PRODUCTION OF WEALTH 27 

refinement and cultivation of tastes, ideas and habits, the 
raising and expanding of character, are a part of the. pro- 
ductive effort of society, and those engaged in these lines 
are as truly productive as those who plow the soil or 
plant the seed or weave the cloth. 

SUGGESTED READING. 

In "Principles of Social Economics," Section II of 
Chapter I., Part II. ; this section treats of production and 
producers, showing why the old definitions must be 
broadened. 

Additional References. In Marshall's "Economics of 
Industry," Chapters III. and IV., of Book II. ; discussing 
production, some phases of consumption, necessaries of 
life, capital and income. It will be noticed that Prof. 
Marshall retains some of the old-school idea as to "pro- 
ductive consumption," etc. 

In Adam Smith's "Wealth of Nations," Chapters I. 
and II., of Book I. ; on the division of labor and its 
economic causes ; also Chapter IX. of Book IV. ; in 
which Dr. Smith attacks the physiocrats' notion of pro- 
duction and shows that manufacturing and mercantile 
industries are as much a part of production as agri- 
culture. 

In John B. Clark's "Philosophy of Wealth," Chapter 
II. ; pointing out the reasons why writers, speakers, mu- 
sicians, etc. j should rightfully be considered producers of 
wealth. 

EXTRACT FROM READINGS. 

Music Is Wealth. "Dr. Roscher has called attention to 
the intrinsic absurdity of calling a violin manufacturer a 
productive laborer, and the artist who plays the violin 
an unproductive one, as is expressly done by Mr. Mill 



2 8 OUTLINES OF SOCIAL ECONOMICS 

and his followers. The violin would, thus, be classed as 
wealth; the music, the sole end of its manufacture, not 
wealth. The product, music, satisfies a direct want, the 
violin only an indirect one; the latter is an instrument 
for producing that which satisfies direct desire. The 
direct want-satisfying product is, if anything, more ob- 
viously wealth than the indirect one. Relative durability 
and tangibility are non-essential attributes. The me- 
chanic who makes the violin imparts utility to wood ; the 
artist who plays it imparts utility to air vibrations. One 
product is perceived by the senses of sight and touch, 
the other by the sense of hearing. One is extremely 
durable, the other extremely perishable; but both alike 
come under our definition. In both a natural agent has 
received a utility through human effort; both products 
are wealth, and both laborers productive." — From John 
B. Clark's "Philosophy of Wealth," Chapter II. 

QUESTIONS FOR REVIEW OR DEBATE. 

i. On what does a clear idea of production depend? 

2. What is production? 

3. Who were the physiocrats and what was their idea of pro- 

duction? 

4. How did Adam Smith succeed in modifying this doctrine? 

5. What classes of people did John Stuart Mill regard as "un- 

productive"? 

6. What is the broader view of production and producers? 

7. For what reasons may professional persons, clergymen, law- 

yers, teachers, musicians, etc., be considered producers of 
wealth? 



CHAPTER V. 



CAUSES OF PRODUCTION. 



24. Necessities and Desires. All production is the 
outcome of desire, springing either from necessity or vol- 
untary wishes, tastes and habits. The first efforts of man 
are, of course, to satisfy the desire for food, because food 
is the original necessity of life which absolutely must be 
supplied before anything further can be accomplished. In 
some very poor and barren countries it requires nearly 
the entire time and strength of the population to supply 
merely these food necessities, with such rude shelter and 
clothing as the climate makes imperative. 

Just so soon as people get a little beyond this state of 
abject poverty and battle with starvation, other desires 
begin to expand and claim attention ; such as the desire 
for personal adornment, for recreation, for better shelter, 
for a larger variety of more palatable food, for travel and 
adventure, even for warfare and plunder ; later, for more 
order and security, for settled homes and government, 
for justice, broader knowledge, and finally for all the re- 
fining, cultivating and elevating features of civilized life. 

In truth, desire is the first motive force in progress. 
It is the disturbing element which makes one grow dis- 
satisfied with what is and struggle for what ought to be. 
Without it there is no motive for the new and the better, 
no motive for change, and hence no impulse to act. All 
desire, of course, does not result in action, but only when 
the desire becomes so strong that it is harder to endure the 



30 OUTLINES OF SOCIAL ECONOMICS 

privation than to make the necessary effort to satisfy the 
want. So that, at bottom, the great work of human 
progress, of civilization, of ethical and spiritual growth, 
begins with stimulating the variety and raising the 
quality of human desires. 

Of course, all desires are not good. It is never true 
that all newness is good. People first learn to want things, 
and in their ignorance and inexperience they often reach 
out for the bad as well as the good. Getting rid of the 
bad and keeping the good is an after process of refine- 
ment and correction. Take, for instance, the matter of 
our food. It used to be very meager and simple. Even 
potatoes were not known till a few hundred years ago. 
The list of foods was slowly enlarged and sometimes in- 
cluded new,, things which were poisonous, creating sick- 
ness and death. But people learned through experience 
to distinguish things that made them ill from those that 
did not, and with the aid of chemistry foods were puri- 
fied and improved, and those that were poisonous were 
ruled out and placed on the list of poisons to be used as 
medicines only and procured by doctors' prescriptions ; — 
hence the drug store, which is largely a poison shop. 

25. Habit and Sentiment. This same process goes 
on in almost all other lines. Progress always begins 
with new desires, and is perfected by weeding out the 
bad desires from the good. As this goes on habits are 
gradually formed, which come to be recognized as "sec- 
ond nature." Habit, because of its tenacity and persis- 
tence, is stronger than government. There is no govern- 
ment, be it ever so despotic, that is powerful enough sud- 
denly to run contrary to the established habits of the 
people. Habit, continued for generations, creates a deep- 
rooted sentiment which is a part of the very life and 
character of the people, and will support or overthrow 



CAUSES OF PRODUCTION 3 1 

forms of government or religion if they come into violent 
conflict with it. 

Habit comes of constant repetition. When habit or 
custom becomes general throughout the community it is 
the ratchet wheel, as it were, of progress ; that is, it is the 
greatest of all influences which prevent society from slip- 
ping backward. What the people have learned to want, 
learned to consume and learned to do, habitually, noth- 
ing can take away from them except social revolution or 
anarchy. Forms of government may come and go, but 
national habits can only be changed by the slow process 
of time. 

Of course, habits may be modified and refined, but this 
must come by exactly the same process that brought the 
original habit. It cannot be done by arbitrary force, but 
by gradually substituting new and superior tastes and 
wants which lead to new and superior habits. 

26. Influence of Education. When we get beyond 
the period where absolute necessity controls all our ac- 
tions, to where habits and seivtiments are formed, our 
opinions and ideas come to have a great deal to do with 
determining our desires. Thus, very much depends on 
the kind of education people have, because education has 
a great influence on our ideas and beliefs. For instance, 
if we teach that monotonous simplicity is superior to va- 
riety of life, and that to desire new things that were not 
used by our fathers is to be frivolous and flippant and 
selfish, — in short, if the education we give tends to re- 
press all new tastes and desires it will stand in the way 
of progress. For example, in China the growth of va- 
riety and newness has been repressed both by religious 
teaching and social caste, and the social desires and cus- 
toms have become fixed and immovable; hence social 
activity is one monotonous round of repetition. The 



32 OUTLINES OF SOCIAL ECONOMICS 

Chinaman wears the same cut of smock and the same 
type of shoes to-day that he did a thousand years ago. 
To the extent that education encourages variety and im- 
provement, hails experiment and invention, it helps 
progress. 

Sanitation is another great influence in progress. It 
adds to the wholesomeness and healthfulness of life, 
which increases the vigor and activity of the people. Pub- 
lic parks and playgrounds and clean streets contribute to 
this same result. Public libraries, churches, museums, 
art galleries, wholesome entertainments and recreation, 
kindergartens and social settlements all share in elevat- 
ing and broadening the tastes and ideas of the people 
and so increasing consumption and improving its quality. 

27. Effect of High Wages on Production. The 
necessities, habits and customs of a people all combine to 
make up what is called their "standard of living." This 
standard of living, as we shall see later on, is the great 
influence that determines rates of wages. Where the 
habits, ideas, tastes and general progress of the people 
have brought about a high standard of living, wages are 
high, and it is through wages (including salaries) that 
the great majority receive their living. Therefore, it is 
easy to see, if wages are high it means that the people 
buy and consume a great amount and variety of products, 
thus giving a large market for producers in every line. 

The purchases of the great body of wage and salary 
earners forms the basis and stimulus of modern indus- 
tries. Hardly any important industry, except such as 
make expensive luxuries, could exist at all if nobody but 
rich persons, business and professional men, etc., bought 
the products. Wage and salary earners form about 
three-quarters of the whole working population of the 
United States. 



CAUSES OF PRODUCTION 33 

Therefore, the amount of wages exercises a most im- 
portant influence upon the extent and methods of pro- 
duction. As wages rise and the demand for products in- 
creases, a market basis is furnished for larger and larger 
investments of capital in industries to supply these de- 
mands. This also justifies expensive experiments to de- 
velop the most perfect tools and machinery that inven- 
tion can furnish. The use of these improvements lessens 
the cost of production and cheapens the products to all 
who buy. When products are cheapened by this method 
they are no less profitable to the capitalists, and hence do 
not lead to depression and loss ; but when products are 
cheapened through inability to sell, which comes from 
diminishing low-wage markets, it ruins the producers 
and inflicts all the ills of business depression and "hard 
times" upon the community. 

SUGGESTED READING. 

In "Principles of Social Economics," Section V. of 
Chapter I., Part II., showing that social consumption 
(demand) is the basis and cause of production. 

Additional References. In John B. Clark's "Philoso- 
phy of Wealth," Chapter III. ; showing the effects of ex- 
panding wants and the real nature of wealth consump- 
tion. 

In Adam Smith's "Wealth of Nations," Chapter III. 
of Book I. ; pointing out how the division of labor, and 
hence progress of industry, is limited by the extent of the 
market. 

In Gunton's "Wealth and Progress," Chapter II. of 
Part I ; the title of the chapter sufficiently explains its 
contents : "Increased Consumption by the Masses the 
Real Cause of Improved Machinery." 



34 OUTLINES OF SOCIAL ECONOMICS 

EXTRACTS FROM READINGS. 

Employments Limited by Market. There are some 
sorts of industry, even of the lowest kind, which can be 
carried on nowhere but in a great town. A porter, for 
example, can find employment and subsistence in no 
other place. A village is by much too narrow a sphere 
for him ; even an ordinary market town is scarce large 
enough to afford him constant occupation. In the lone 
houses and very small villages which are scattered about 
in so desert a country as the Highlands of Scotland, every 
farmer must be a butcher, baker, and brewer for his own 
family. In such situations we can scarce expect to find 
even a smith, a carpenter, or a mason, within less than 
twenty miles of another of the same trade The scattered 
families that live at eight or ten miles' distance from the 
nearest of them, must learn to perform for themselves a 
great number of little pieces of work, for which in more 
populous countries they would call in the assistance of 
those workmen. Country workmen « are almost every- 
where obliged to apply themselves to all the different 
branches of industry that have so much affinity to one 
another as to be employed about the same sort of mate- 
rials. A country carpenter deals in every sort of work 
that is made of wood; a country smith in every sort of 
work that is made of iron. The former is not only a car- 
penter, but a joiner, a cabinet-maker, and even a carver 
in wood, as well as a wheelwright, a ploughwright, a 
cart and wagon maker. The employments of the latter 
are still more various. It is impossible there should be 
such a trade as even that of a nailer in the remote and in- 
land parts of the Highlands of Scotland." — From Adam 
Smith's "Wealth of Nations," Chap. III. of Book I. 



CAUSES OF PRODUCTION 35 

QUESTIONS FOR REVIEW OR DEBATE. 

i. What is the great active cause of all production? 

2. From what does this force spring, in the first instance? 

3. Name some of the varieties of desires that are developed 

after absolute necessities are supplied. 

4. Under what conditions only do desires result in action? 

5. How are habits and sentiments developed, and what are 

their effects? 

6. Why is the kind of education we give an important factor in 

progress? Give an example of the wrong kind of edu- 
cation? 

7. Name some of the institutions and public policies that pro- 

mote wholesome consumption. 

8. What is the "standard of living" and what has it to do with 

wage rates? 

9. What class furnishes the largest part of the market demand 

for products? / 

0. What is the effect of high wages on the amount and methods 
of production? Give the reasons for this. 



CHAPTER VI. 

FACTORS AND METHODS OF PRODUCTION. 

28. The Great Factors. Strictly speaking, there are 
but two great factors in the production of wealth, man 
and nature. Man's contribution is his personal efforts of 
hand and brain, grouped under the general head of "la- 
bor." Nature's contribution is two- fold : the great forces 
of gravitation, heat, sunlight, wind, electricity, animal 
power, the germinative power of seeds, ct cetera; and 
the passive resources from which wealth is extracted, 
such as soil, mines, forests, and living creatures suitable 
for food supply. 

In economics, however, we cannot take account of the 
vast immeasurable forces of nature in general, as to their 
total power and usefulness to mankind; that belongs to 
the field of abstract speculation. We can reckon with 
these forces only to the extent that they are or can be ac- 
tually utilized, by means of various machines and struc- 
tures, which are usually managed or guided by some 
form of labor. These machines and structures are sim- 
ply so many forms of "wealth used in the production of 
wealth," — that is, capital. Therefore, instead of trying 
to deal with natural forces by themselves, as factors in 
production, we can only take account of them through 
the means by which we utilize them, namely capital and 
labor. Therefore, we speak of capital and labor as the 
two active agents, in production, and whatever produc- 
tive power they yield is considered to include whatever 

36 



FACTORS AND METHODS OF PRODUCTION 37 

natural forces are utilized by their aid. Capital also in- 
cludes all unfinished wealth in process of production, 
since this is for the time being simply "wealth used in 
production." 

Natural resources, which are nature's other great con- 
tribution, are grouped for convenience under the head of 
land. This includes all of the earth surface occupied or 
available for human use, with whatever it naturally con- 
tains and spontaneously bears ; even sea food is brought 
under this head to avoid an unnecessary separate classi- 
fication. Oceans and lakes, except restricted fishing 
grounds, occupy the same position in economics as free 
land which pays no rent. 

Thus, for the purposes of economic reckoning, we 
speak of three great, factors in production ; labor, capital 
and land. Labor includes all forms of productive human 
effort. Capital includes all machines, tools, structures 
and arrangements contrived to utilize natural forces or 
assist human labor ; also all unfinished wealth in process 
of production. Land includes all natural resources, 
meaning principally of course the occupied or available 
earth surface and all its natural qualities and elements, 
such as fertility, mineral deposits, forests and wild ani- 
mal life. Land not yet available for human use is not 
within the range of economics ; it is not wealth, and we 
can only take account of it as "land" when it does be- 
come available. 

20. Hand Labor Era. Division of Labor. In the 
earliest and simplest state of society practically all in- 
dustry was carried on by hand labor. Men lived by gath- 
ering roots and fruits and by taming and herding animals. 
Very early the use of crude tools began, — traps and 
weapons to capture or kill wild animals, tackle for fish- 
ing, stone hatchets, kettles, baskets and canoes. As agri- 



38 OUTLINES OF SOCIAL ECONOMICS 

culture developed, implements for tilling the soil were 
devised, and structures built for storing the crops. In 
this early period, also, began the division of labor, which 
has ever been one of the most important and really in- 
dispensable features of all industrial progress. So long 
as each individual had to supply all his own wants by his 
own direct efforts, nothing but poverty and degradation 
could be the result. As soon as men began to act and 
live together in any sort of settled relations, the custom 
arose of dividing pursuits among different groups; the 
men hunted and fought while the women guarded the 
huts and property and made baskets; then some of the 
men herded while others followed the chase, and still 
others did the fighting and governing; later on, some 
began to devote their whole time to agriculture, some to 
trade, some to crude mechanic arts. Every new division 
of labor brought a prompt and notable increase in pro- 
ductive power, order and safety, and a larger social life. 
This has been true of every successive subdivision or 
specialisation of industry down through all the vast de- 
velopments of capitalistic production. 

Simple manufacture began, of course, with the making 
of crude weapons and tools, and later on developed into 
higher forms, such as metal-working, spinning and 
weaving, cobbling and tailoring, — all done with very 
simple and primitive instruments. Although these crude 
aids to industry were forms of capital, they were merely 
aids to direct hand labor and it was still the hand-labor 
era. There came to be masters and apprentices, but no 
employers and wage-earners as we know them. Every 
man or family worked separately, and made practically 
no use of natural forces ; all was done by human effort, 
aided by simple tools and machines. This was the slowest 
and dearest method of production, requiring the most 



FACTORS AND METHODS OF PRODUCTION 39 

labor for the least results. Some industries in our own 
limes are still in the hand-labor era in many respects, such 
as frontier agriculture, cobbling, peddling, small store- 
keeping, sweatshop clothing-making, et cetera; and back- 
ward countries like China and India are almost entirely 
in the hand-labor period. 

30. Capitalistic Production. The use of capital on a 
large scale, accompanied by the sub-division of labor 
within each industry, marks a great step in the progress 
of society. Under the capitalist and wages system all 
the tools, machinery, structures and raw materials of 
production are owned by the "capitalist" or group of 
capitalists, who employ workers for definite and agreed 
amounts of pay, the workers furnishing only their labor. 

The rise of "capitalism" as a separate factor neces- 
sarily -came with the wages system. There cannot be 
wage laborers without employers ; so that, when the 
villeins and serfs in the middle ages gradually bettered 
their lot and became wage-workers, with the freedom at 
least to choose their own employers, this brought with it 
the employing or capitalist system. For a long time the 
only difference was that the capitalist, instead of owning 
material, land, tools, laborers and all, as before, now only 
owned material, land and tools. It was a change which 
took the laborer away from the master or lord as property 
and made him a social and bargaining factor. From the 
fourteenth to the eighteenth century freedom of in- 
dividual action in industry gradually developed, some 
laborers became employers, and thus competition arose 
between employers or capitalists. In the eighteenth cen- 
tury, with the inventions which started the factory sys- 
tem, the capitalists became a distinct group. These in- 
ventions gave us the capitalist system of production, 



40 OUTLINES OF SOCIAL ECONOMICS 

which has revolutionized industry and commerce and the 
relations of the different classes in society. 

The great feature of capitalist production is that it sub- 
stitutes natural forces, by the use of machinery, and 
wage-workers on machinery, for the older and more di- 
rect hand labor. Like every other great change this has 
been the subject of long and sharp discussion. For a 
long time it was declared, and there are many who still 
believe, that this is an injury. While the use of ma- 
chinery clearly results in more wealth being produced, it 
is charged that the capitalist gets all the increase. This 
is a very one-sided view, which is not at all sustained by 
the facts. Capitalist production does introduce great 
labor-saving appliances, which either produce more 
wealth with the same expenditure or the same amount of 
wealth at less cost. In either case, the result is a surplus 
which some people, especially the socialists, insist is all 
kept by the capitalists, which they declare is robbery of 
labor. 

But this charge is not true. If it were, there could have 
been no reduction in the prices of commodities furnished 
by capitalist production. The multitude of articles of 
food, clothing, furniture, books, papers, public conve- 
niences, and what not, would cost just as much now as 
they did when furnished by hand labor. We all know 
they do not. If they did we could have not half, perhaps 
not a quarter, of the number of things which are now a 
part of our regular daily use. If food and clothes and 
shelter cost as much to-day, quality considered, as when 
produced by hand labor, coarse food and coarser cloth- 
ing and very poor housing would be all that most of us 
would now get. Prices have fallen steadily wherever 
capitalist production has been successfully carried on. 



FACTORS AND METHODS OF PRODUCTION 4 1 

31. Effects of Machinery on Labor. Does ma- 
chinery injure labor? is a very important question in con- 
sidering this subject. It is charged that it does, because 
it displaces laborers and creates enforced idleness. There 
is a half truth in this. It cannot be denied that an im- 
proved machine will produce the same wealth with less 
labor or more with the same labor than the old one, else 
there would be no gain in it. That means, of course, that 
it will supply a certain market demand with fewer la- 
borers than before. If it were true that this demand 
never became any larger, then it would be true that 
fewer and fewer laborers would be needed as machinery 
was introduced. But the market does increase, not only 
by the higher wages made possible by the better ma- 
chinery, not only by the natural growth of population, but 
largely because the new machine so reduces the cost of 
producing an article that it can be sold at a much lower 
price, which greatly enlarges the demand for it. The 
producer is tempted to lower the price, not by any gen- 
erosity to the public, but in the hope of getting this 
larger trade. 

Almost always the result of this, sooner or later, is 
that as many and even more laborers are needed in the 
business than before the new machinery was introduced. 
It is probably safe to say that there are not two per cent. 
of the well-established industries in which much im- 
proved machinery has been introduced that have not had 
to increase instead of diminish the number of laborers 
employed. If we compare some sixty or more machine- 
using industries from 1880 to 1890 we find that in nearly 
every instance the number of laborers employed in the 
industry increased, the price of the product was lowered, 
and the wages per laborer rose. 

In the long run it may be safely said that machinery is 



42 OUTLINES OF SOCIAL ECONOMICS 

the friend and helper of labor, and not its enemy and 
oppressor. 

32. Effect of Corporations and •« Trusts." Where 
an industry requires a large amount of capital it has be- 
come customary to organize "corporations/' in which 
large numbers of people are enabled to unite their cap- 
ital, some in small amounts and some in large, and em- 
ploy skilled and able managers to conduct the business. 
A few years ago many corporations attempted to form 
"trusts," or agreements to control all the product in their 
special industries and raise prices. Every one of these 
attempts failed, sooner or later, but they have been fol- 
lowed by a great tendency to reorganize numbers of 
small corporations into large ones, for the sake of econ- 
omy and more stable business. The old name "trust" is 
commonly applied to these large corporations, but they 
are not trusts at all. They are simply large corporations. 

The effect of these large concerns upon the public is 
regarded with a great deal of distrust. Indeed, they are 
regarded in much the same way that laborers and hand 
workers regarded machinery when it was first intro- 
duced. But these large corporations are simply the latest 
form of capitalist production. They are to small con- 
cerns what machinery is to tools, and the latest is the best 
because it will work most. cheaply and effectively; if it 
did not it would not be adopted. This latest form of cap- 
italist production saves a great many wasteful expenses 
which the small, petty concerns make necessary. 

This saving by large corporations operates exactly like 
the saving created by better machines. First, it increases 
the profits of the management ; then, by competition and 
the efforts for larger sales, that profit is shared by the 
community in the form of lower prices. Where very 
large concerns exist, lower prices and usually better 



FACTORS AND METHODS OF PRODUCTION 43 

products are the results in the long run. Concerns which 
try to avoid this movement, and keep up prices arbi- 
trarily, almost certainly collapse or are driven out by 
competition. 

Large concerns also tend to give permanence to busi- 
ness. They are conservative. They look ahead with the 
view of keeping steady business, because to stop for a 
month or two in the year involves a great loss. This 
steadiness is a great advantage to wage-workers. Few 
things are more important to them than steadiness of 
employment, and few things are more important to the 
public in general than stability of business. Large con- 
cerns contribute more to this business stability and per- 
manence of employment than any one factor in modern 
times. 

So that, large corporations, while they sometimes have 
arbitrary and foolish and even dishonest management, 
and while they have some bad features which call for 
improvement, just as every new thing has, do contain 
the elements of improved industrial conditions. They 
contribute cheapness of commodities, stability of busi- 
ness and permanence of employment, — three things that 
are of vast importance to modern society. We ought to 
be careful, therefore, in attempting to reform corpora- 
tions, not to strike at the vital features which give these 
results, but only seek to get rid of the temporary defects, 
and protect the rights of investors and the public in 
general. 

SUGGESTED READING. 

Tn "Principles of Social Economics," Sections III. and 
IV. of Chapter I., Part II. ; on the three factors in pro- 
duction and the conditions under which natural forces 
can be used ; also Chapter VI. of Part IV. ; discussing 



44 OUTLINES OF SOCIAL ECONOMICS 

the question of large corporations, or "combinations of 
capital." 

Additional References. In Marshall's "Economics of 
Industry," Chapters L, II., IX., X. and XL, of Book IV. 
These chapters deal with the agents of production, land 
and its fertility, division of labor, concentration of in- 
dustries and production on a large scale. 

In Hadley's "Economics," Chapter VI., on "Combina- 
tion of Capital," and Chapter XL, on "Machinery and 
Labor." 

In John Stuart Mill's "Principles of Political Econ- 
omy," Chapter IX. of Book I. ; on "Production on a 
Large and Production on a Small Scale." 

In Gunton's "Trusts and the Public," Chapters I., V. 
and XVI. ; discussing various features- of the so-called 
"trust" problem in the light of recent developments. 

In Frederick Starr's "First Steps in Human Progress,'' 
Chapters I. to XII., inclusive; describing the primitive 
arts and industries of mankind. 

In Sir John Lubbock's "Origin of Civilization," Chap- 
ter II. ; describing industrial life among savage tribes. 

EXTRACTS FROM READINGS. 

The Earliest Tool. "Perhaps the oldest implement of 
man we know is the flint hache from the glacial gravels 
of France and other parts of Western Europe. It is a 
coarse, heavy, rude implement, chipped to shape by great 
spalls being broken from its surface. It is somewhat 
almond-shaped ; may average about a hand's length ; is 
thick and heavy. It is probable that this object was used 
for many purposes. It would be a weapon grasped in 
the hand and used in close combat ; it would be a hatchet 
for breaking open bones to get at the marrow ; it would 
be a knife for forcing open shells of mollusks ; it might 



FACTORS AND METHODS OF PRODUCTION 45 

be an ice-pick for cutting holes through the ice in winter 
in order to get at fish. Taylor mentions that the spear- 
point of iron which the African has made for himself 
may be used by him as a knife for smoothing the spear- 
shaft itself. The stick which the primitive man picked 
up in the woods he would use for every purpose. Hurled 
at a passing bird, it was a missile ; held in the hand and 
wielded for defense, it was a war-club ; used for thrust- 
ing, it became a spear ; as a digger of roots it was, per- 
haps, the first agricultural implement ; to the man astride 
a floating log upon the river, the same stick became a 
help in handling the primitive craft." — From Frederick 
Starr's "Some First Steps in Human Progress," Chapter 
X. 

Labor Not Displaced. "Machinery has not displaced 
labor. On the contrary, there has been a most con- 
spicuous increase of employment in those lines where 
improvements in machinery have been greatest. The 
number of persons engaged in manufacturing and trans- 
portation to-day bears a far larger proportion to those 
engaged in agriculture than was the case two or three 
generations ago. The urban population makes more use 
of machinery than the rural population ; and it is a con- 
spicuous fact that our cities have grown faster than the 
country as a whole. Whatever else machinery may have 
done, it certainly has not kept labor out of mechanical 
industries." — From Hadley's "Economics," Chapter XL 

Advantages of Large Production. "The possibility of 
substituting the large system of production for the small, 
depends, of course, in the first place, on the extent of the 
market. The large system can only be advantag'eous 
when a large amount of business is to be done; it im- 
plies, therefore, either a populous and flourishing com- 
munity, or a great opening for exportation. Again, this 



4.6 OUTLINES OF SOCIAL ECONOMICS 

as well as every other change in the system of produc- 
tion, is greatly favored by a progressive condition of capi- 
tal. It is chiefly when the capital of a country is receiv- 
ing a great annual increase that there is a large amount 
of capital seeking for investment; and a new enterprise 
is much sooner and more easily entered upon by new 
capital than by withdrawing capital from existing em- 
ployments. The change is also much facilitated by the 
existence of large capitals in few hands. It is true that 
the same amount of capital can be raised by bringing to- 
gether many small sums. But this (besides that it is not 
equally well suited to all branches of industry) supposes 
a much greater degree of commercial confidence and en- 
terprise diffused through the community, and belongs al- 
together to a more advanced stage of industrial prog- 
ress." — From Mill's "Principles of Political Economy," 
Chapter IX. of Book I. 

QUESTIONS FOR REVIEW OR DEBATE. 

t. What are the three factors in the production of wealth? 

2. What is meant by "labor"? 

3. What is meant by "capital"? 

4. What is meant by "land"? 

5. Describe the early and simple methods of producing wealth. 

6. How did the division of labor and use of capital begin? 

7. What are the distinct features of the capitalist and wages 

system? 

8. Do the capitalists receive all the benefits of capitalistic pro- 

duction? What do the facts show? 

9. What are the temporary and permanent effects of machinery 

on the employment of labor? 
10. What is the object of corporations? 
it. What were the "trusts," what became of them, and why? 

12. Describe the advantages of large corporations. 

13. Are the defects of large corporations a necessary part 01 

them or due to unwise management? What should be 
our attitude toward them? 



CHAPTER VII. 

FACTORS AND METHODS OF PRODUCTION— Continued. 

33 Beginnings of Exchange. In primitive society, 
as soon as industries became at all specialized or sub- 
divided, the necessity arose of exchanging products. 
Those who minded flocks of sheep or herds of cattle 
could not attend to the plowing, planting and harvesting 
of crops, and neither could the shepherds or farmers 
very well attend to the making of clothing, when woven 
garments took the place of skins. Therefore, those who 
raised sheep had to exchange the wool and mutton for 
food and clothes, and those who raised crops had to ex- 
change the grain and vegetables for wool and meat and 
clothing, and those who made clothing had to exchange 
what they did not themselves need for meat and grain 
and wool. This exchange was at first a direct "swap- 
ping" of goods for goods, and whenever or wherever 
that takes place it is known as "barter." As the number 
and variety of commodities increased, the feasibility of 
this direct barter diminished. It was quite easy to ex- 
change simple commodities in bulk, as wheat for sheep, 
but when articles became more unlike and numerous this 
barter system grew to be very cumbersome and difficult. 
So it came to be necessary to have some one thing whose 
value should be a standard by which the value of other 
things could be measured, and for this purpose money 
came into use. 

34. floney. Money has been made of all sorts of 

47 



48 OUTLINES OF SOCIAL ECONOMICS 

materials at different times and in different countries, — 
skins, shells, grain, cattle, even tobacco, etc. In selecting 
the material from which it shall be made it is necessary 
to have in mind the uses to which it is to be put. In the 
first place, money must be made of a commodity which is 
itself valuable, so that those who receive it in exchange 
or payment for a commodity may get something which 
is as valuable as that with which they part. Then, in 
order to do the work of money, it must be something 
which can be divided into very small portions, so that 
small quantities of different things can be purchased and 
pieces of money to the exact value of the purchases be 
given in exchange. 

After a great deal of experimenting with different ma- 
terials, the countries that were most advanced began to 
use metal coins as money. Iron, copper, nickel, silver 
and gold have been used. Certain quantities of metals 
were stamped to show that they were of the right weight 
and quantity, and so the system of coinage was developed. 
As civilization advanced, the most expensive metals came 
into use as money because of their greater convenience 
and less liability to change in value. But gold, for in- 
stance, could not be used in poor and semi-civilized coun- 
tries as money. It is so valuable that it could not be 
made into pieces small enough for the people to make 
their ordinary purchases. In China, gold coins could 
not be made small enough to pay a week's wages, and of 
course no one could use money which required paying a 
whole week's wages in a single coin. It had to be made 
of material which could be divided up into pieces small 
enough for their small wages and purchases. The wages 
are so low in China and India that most purchases can- 
not be made even with silver, so they are compelled very 
largely to use copper, and even iron. 



FACTORS AND METHODS OF PRODUCTION 49 

But as people become better off and large purchases are 
made, the more valuable metals become indispensable. 
For instance, it would be impossible to make some of the 
large purchases that are common in this country to-day 
with iron money. The cost of handling the money 
would make the transaction immensely expensive. In 
advanced civilization the most valuable metals become 
the most economical and best fitted for use as standard 
money. That is why, as nations grow in wealth and com- 
merce, they tend to substitute gold for silver standard 
money, but even gold becomes too burdensome. When 
trade and commerce reach great proportions another in- 
novation has to be made, namely, the use of paper money, 
representing gold or silver and redeemable in these 
metals, but much more convenient to use. In small 
dealings, not only coin, but coin made of cheap material 
can be used and everything paid for in cash, but, as com- 
modities multiply in number and business increases in 
volume, cash payments become burdensome and impos- 
sible. Then comes the use of this paper money, and 
banking is developed as a further and most effective ad- 
dition to the methods of exchange. 

35. Banking. Banks are established to aid exchange 
by the use of business faith or "credit," so that business 
can be carried on without money changing hands at all. 
Money is deposited in these banks by large numbers of 
people, who, when they wish to buy something, instead 
of handing over the cash give a check or order on their 
bank; and the person receiving the check may often de- 
posit it to his own credit in the same bank, so that no 
money changes hands. Probably nine-tenths of the busi- 
ness of this country is done in this way, and without any 
use of money. 

Of course, in the constant round of business some of 



50 OUTLINES OF SOCIAL ECONOMICS 

these checks are redeemed in coin. Then, too, checks 
given on one bank will be deposited in several other 
banks, but this does not mean that each bank pays the 
others in cash for all the checks they hold against it. 
Every bank holds checks against many of the other 
banks, and so a large part of the accounts are cancelled 
and only the balances are paid in cash. In large cities, 
messengers from all the banks meet every morning at 
a "clearing house" and exchange checks, taking back the 
cash balances due them. If, for instance, one bank has 
checks against another amounting to $500,000, and the 
second bank has checks against the first amounting to 
$490,000, the second bank pays the first bank only $10,- 
000 ; the rest of the account is mutually cancelled because 
the one offsets the other. In this way checks have be- 
come the civilized world's great instrument of exchange, 
by which commodities or properties from one dollar's 
worth to a million dollar's worth are exchanged to suit 
the convenience of the wage-earner as well as the rich. 

Banks do more than this. A great deal of money is 
usually left with them on deposit all the time, and this 
they loan out to others who want it for business purposes. 
So the banks serve as an instrument by which the unused 
money of those who have a surplus is made available for 
others who temporarily have a shortage. Banks usually 
have the right, also, to issue their own notes — "bank- 
notes," secured and guaranteed in various ways, and 
these they can loan out for business purposes. Bank- 
notes serve the same ends as money. 

36. Transportation and Markets. The final stage in 
production is getting the goods to the consumer, and this 
requires transportation and markets. As society grows 
more complex, exchanges are not limited to special lo- 
calities, but extend to the extreme parts of the earth. 



FACTORS AND METHODS OF PRODUCTION 5 I 

The American dinner table calls for the products of al- 
most every part of the globe. To accomplish these great 
exchanges transportation is indispensable. At first, the 
products were carried on men's backs, then domestic ani- 
mals like the pack-horse and the mule were used, and 
canoes and rafts where possible; then wagons and 
coaches, and, finally, through the application of steam 
and mechanical invention, steamships and railroads were 
developed. Without railroads, probably more than 90 
per cent, of the present exchanges of products would be 
impossible. Clearly, therefore, production is not merely 
the securing of materials and manufacturing articles, but 
includes distributing them over the face of the entire 
globe, wherever required. 

Commodities are not generally shipped direct to the 
consumer, but are sent first to local merchants or deal- 
ers, — "middlemen," — all over the country and perhaps 
world, who hold them in stock and sell in large or small 
amounts to the final consumers as they may desire to 
buy. This is also a necessary part of production, and is 
usually a real economy. If every consumer had to order 
direct from the farm or factory, the expense of shipping 
such small quantities would greatly increase the price, to 
say nothing of the loss of time. 

Exchange, therefore, requires the use of money, of 
banking, of transportation, and of stores or markets, and 
all are necessary factors in the production of wealth. 

SUGGESTED READING. 

In "Principles of Social Economics," Chapter VI. of 
Part II., on "Money and Its Economic Function." This 
chapter goes rather fully into the money question. Its va- 
rious sub-divisions explain what money is, its economic 
functions, how its value is determined, the depreciation 



52 OUTLINES OF SOCIAL ECONOMICS 

of money, and by whom money should be coined or is- 
sued. The sections involving the question of the value 
of money will be understood better after the chapter in 
this volume on "Value or Price." 

Additional References. In Charles F. Dunbar's 
"Theory and History of Banking/' Chapters I. to VI., 
inclusive. These chapters explain in detail, for those 
who wish to go into the subject carefully, the nature of 
banks and the operation of the banking system, including 
discounts, deposits, banking accounts, checks, bank-notes 
and reserves. 

In Hadley's "Economics," Sections 201 to 215, inclu- 
sive, in Chapter VII. These sections discuss the uses of 
money, its forms (including paper money), seigniorage 
and depreciation. 

In Hadley's "Railroad Transportation, Its History and 
Its Laws," Chapters I. and II. , describing "The Modern 
Transportation System" and "The Growth of United 
States Internal Commerce." The rest of this volume 
deals largely with the problems of railroad rates, dis- 
criminations and management, and foreign railroad sys- 
tems ; it is useful for special students of transportation. 

EXTRACTS FROM READINGS. 

The Bank Check System. "The depositor, or the cred- 
itor of a bank, who has to make a payment to some other 
person, has his choice between two methods of making 
it. He may demand money from the bank, in the exer- 
cise of his right as a creditor, and deliver this money ; or, 
with the assent of the person to whom he has to make 
payment, he may give to this person an order on the bank 
for the money, or what is commonly called a check. If he 
adopts the latter method, a payment for goods or of a 
debt is effected by the simple transfer of a right to de- 



FACTORS AND METHODS OF PRODUCTION 53 

manci money from the bank ; and so too if the recipient 
of the check gives it in payment to some third person, and 
he to a fourth, and so on. To this extent the check is 
plainly made a substitute for the sum of money for which 
it calls. It represents no particular money or group of 
coins, for, as we have seen, the deposit is likely to have 
been created by the bank in exchange for some security 
bought by it, and is, therefore, a naked right to demand 
and not a claim to any particular cash; and even if the 
deposit originated in the lodging of money by the deposi- 
tor, it has in this case also become a naked right to de- 
mand and does not imply any claim to the money actually 
deposited. But the transfer of this naked right, in the 
case supposed, is made by the agreement of the parties to 
serve the same purpose as the transfer of money, and the 
right thus becomes a substitute for money. 

"The effectiveness of this substitution, however, is in- 
creased and the use of the deposit greatly prolonged, 
where it is the practice for the transferee himself to de- 
posit the check instead of demanding its payment by the 
bank, or seeking his opportunity to use it in some pay- 
ment of his own." — From Dunbar's "Theory and His- 
tory of Banking," Chapter IV. 

Transportation a Century Ago. "One hundred years 
ago the United States had no system of transportation. 
Except on natural water courses it had very little 
transportation of any kind. The roads were built by local 
authorities for local purposes — and badly built at that. 
Wagon conveyance was slow and expensive. It took a 
week to go from Boston to New York by stage, and 
nearly three weeks to reach Charleston. Although this 
was the most frequented route, there was only a tri- 
weekly mail at best. The postal service was irregular and 
unsafe. Passenger journeys were attended with discom- 



54 OUTLINES OF SOCIAL ECONOMICS 

fort, and not infrequently with danger. Long-distance 
freight movement was absolutely impossible. The charge 
for hauling a cord of wood twenty miles was three dol- 
lars. For hauling a barrel of flour one hundred and fifty 
miles it was five dollars. Either of these charges was 
sufficient to double the price of the article and set a prac- 
tical limit to its conveyance. Salt, which cost one cent a 
pound at the shore, would sometimes cost six cents a 
pound three hundred miles inland, the difference repre- 
senting the bare cost of transportation. It was on these 
cheap articles of common use that the charge bore most 
heavily. It forced every community to live within itself." 
From Hadley's "Railroad Transportation, Its History 
and Its Laws," Chapter II. 

QUESTIONS FOR REVIEW OR DEBATE. 

i. At what stage in progress did exchange first become nec- 
essary? 

2. What is money, and why did it come into use? 

3. Of what materials has money been made at different times 

and in different countries? Why has the tendency been 
to use more and more expensive metals? 

4. Mention some of the necessary qualities of money. 

5. What is paper money, and what purpose does it serve? 

6. How do banks make it possible to use "credit" as a means 

of exchange? Describe the check system. 

7. In what way are the accounts of banks against each other 

settled, especially in large cities? 

8. In what other ways do banks render aid to industry and 

enterprise? 

9. Explain the importance and methods of transportation, as a 

factor in wealth production. 
10. Who are the "middlemen"? What service do they render 
in production, and are they a burden or a saving to con- 
sumers? 



CHAPTER VIII. 



CONSUMPTION OF WEALTH. 



37. Consumption the Object of Production. Con 

sumption is both the first and the final object of produc- 
tion. Whatever the form of production, whether it is 
near to or remote from consumption, it is governed by 
consumption. The primitive producer, even of the Rob- 
inson Crusoe type, is governed in his fishing and hunting 
entirely by his desire to consume fish and game. If he 
did not wish to consume fish or game he would neither 
take the trouble nor run the risk of hunting and fishing. 

When production reaches a more advanced state, 
where the first producers sell their products to whole- 
salers, and they to retailers, the connection between pro- 
duction and consumption is not so obvious, at first sight, 
but it is none the less real. The farmer who raises wheat 
in Dakota or wool on the plains of Australia is none the 
less producing for consumption because he is far from 
market. He sells to the speculator, who in turn sells to 
the miller or manufacturer, and he to the merchant; but 
merchant, speculator and farmer are all finally governed 
by what the consumer will actually buy. 

Beyond the elementary products required to sustain life, 
consumption is wholly a matter of habits, tastes and cus- 
toms ; in other words, it is a social rather than industrial 
fact. The variety and character of the objects consumed 
determines what will be produced. In China or other 
pagan countries they produce idols, for which in Chris- 

55 



56 OUTLINES OF SOCIAL ECONOMICS 

tian countries there is absolutely no demand, and hence 
none are produced. There are some industries, how- 
ever, in this country and elsewhere that produce com- 
modities for use in India and China. These things could 
not be sold in England or the United States, but their 
character is as much determined by the kind of consump- 
tion in China as if the Chinamen themselves had made 
them. Consumption is in reality the final expression of 
desire and demand. Business is based upon it. Every- 
day regular consumption is the basis of future produc- 
tion. The market for the future is estimated by the 
market of the past. Production is always and every- 
where the effort to supply something which is demanded 
for consumption. 

38. Public and Private Consumption. Private con- 
sumption is the direct consumption of wealth by indi- 
viduals. Public consumption is the use of wealth by the 
people in common. For example, public expenditures 
for streets, water, drainage, parks, museums, police, 
board of health, etc., are forms of public consumption. 
Both of these kinds of consumption, private and public, 
affect production in practically the same way. Both 
kinds of consumption are governed entirely by the tastes 
and habits of the people, and in turn affect human quality 
and character. Both contribute to the education of the 
people. Private consumption, represented by houses, 
clothing, literature, art, music, amusements and social 
contact, tends to refine, cultivate and improve the tastes, 
habits and character of the individual. Every beautiful 
building, every clean street, every new appointment 
which adds to the convenience, sanitation or attractive- 
ness of the streets or homes, is just so much civilizing 
and refining influence. 

39. Social Effects of Consumption. The social ef- 



CONSUMPTION OF WEALTH 57 

feet of all this is shown in the habits, tastes, manners, in- 
telligence and character of the people. Indeed, it might 
be safely laid down as a general proposition that the 
civilization of a community or nation is broadly deter- 
mined by the extent and variety of its consumption. 
Small consumption per capita always means crude and 
relatively costly products, because where the demand is 
small the production is sure to be carried on by primitive 
methods, mainly by hand labor. Wherever hand labor 
prevails the variety of products is slight. When the con- 
sumption is very large it is sure to be varied. When- 
ever the products consumed are few in number and of 
uniform style the total amount used is always relatively 
small. For instance, if all clothing were made alike there 
would be no motive for change, and hence a single suit 
would do as well as twenty. But when commodities have 
to satisfy the artistic sense and taste for beauty and 
comfort then the forms become practically unlimited. 
Large consumption is always expressed in a large and 
varied market, and this is what calls out inventions and 
experiments and large investments of capital in new lines 
of production. All our complex machinery, from the 
first spinning frame to the modern printing press and 
electrical plants, which have lessened the cost and low- 
ered the price of products, have come because of and 
depend entirely upon the growth of the market, or in- 
creased consumption. 

So that, the social effect of consumption is really to 
give a higher standard of living and larger measure of 
civilization in proportion as it is large and varied; or, to 
give primitive barbarism in proportion as it remains 
small. Consumption is the key to civilization. Progress 
comes with the increase and diversification of consump- 
tion. Let science, art and statesmanship stimulate and 



58 OUTLINES OF SOCIAL ECONOMICS 

diversify desires and demands, leading to consumption, 
and self-interest will set in motion the producing forces 
to furnish the required supply. 

40. Useful and Wasteful Consumption. There is a 
good deal said about "wasteful" consumption. This is 
a part of the old idea that consumption is waste unless 
it is for the special purpose of further production. In 
reality, all consumption leads to production. Of course, 
there is useful and less useful consumption. Consump- 
tion may be regarded as wasteful which results in op- 
pression, crime and immorality. While this class of 
consumption stimulates production it serves no useful 
end in the community, but actually results in harm. But 
it is a great mistake to suppose that all wealth which is 
used to satisfy the demands and tastes of people who 
are not engaged in business is wholly wasted ; such, for 
instance, as the highly expensive furnishings of the 
homes of the rich or the lavish expenditures on social 
entertainments. 

This cannot be regarded as wasteful consumption. It 
is this very class of consumption that constantly brings 
in and develops variety of products, which gradually 
come within the reach of larger and larger numbers. 
New artistic products, or "luxuries," are first introduced 
for the seemingly extravagant people who can pay for 
the experiments and high-priced hand labor required to 
bring out the small quantity at first demanded. This is 
the beginning of the market for new and improved prod- 
ucts. As soon as the use of them becomes established 
and the methods of production permit a little lower 
prices, the demand spreads among people of smaller pur- 
chasing power. This increases the market and leads to 
increased production, which, in turn, calls for more scien- 
tific and effective methods. This so lowers the price that 



CONSUMPTION OP^ WEALTH 59 

a larger and larger proportion of the community can af- 
ford to buy the products. 

It is in this way that carpets, furniture, pictures, liter- 
ature, musical instruments, stoves, sewing machines, and 
the multitude of common furnishings of the laborer's 
home, were first introduced. They were made at first 
only for the royalty and nobility, but now, produced by 
capitalist factory methods, have become the daily pur- 
chases of the laboring class. 

Therefore, whether consumption is useful or waste- 
ful is not necessarily or even usually a question of 
whether the thing used is expensive or even "extrava- 
gant," if the buyer can afford it, but it is a question of 
whether it leads to higher refinement, comfort or con- 
venience, or to coarseness, excesses, ill health, immo- 
rality or crime. This is the real test. 

SUGGESTED READING. 

General References. In Marshall's "Economics of In- 
dustry," Chapters IV., V. and VI., of Book III. These 
chapters contain many interesting comments on the na- 
ture and elasticity of various desires and demands, the 
effects of wealth consumption, the kinds and amounts of 
gratification yielded by different forms of wealth, etc. 

In John B. Clark's "Philosophy of Wealth," Chapters 
III. and IV. Chapter III., which relates more directly 
to desires and demands as the causes of production, has 
already been suggested in connection with the reading 
in Chapter V., but in its latter portion especially is very 
applicable to the present topic. Chapter IV. is on "The 
Elements of Social Service," and contains many excellent 
observations on the nature and effects of consumption. 



60 OUTLINES OF SOCIAL ECONOMICS 

EXTRACTS FROM READINGS. 

Consumption the Social Object of Production. "To 
draw a line between that which, when consumed, gives 
capacity for labor, and that which does not, is impracti- 
cable. Comforts, as well as necessities, may increase the 
ability to work, and necessities, as well as comforts, may 
give gratification. The food of nearly every man satisfies 
wants higher in the scale than that of simple nourish- 
ment; it gives a sensuous gratification distinct from its 
nutritive action. The clothing of every one above desti- 
tution satisfies higher wants than those of warmth and 
protection, those, namely, of personal adornment and of 
social consideration. So with the dwelling, and the entire 
surroundings. It is impossible to say that food, cloth- 
ing, and shelter are productively consumed, or even that 
distinguishable portions of them are so. 

"To consume only productively one must eat the cheap- 
est food that will adequately nourish, wear the simplest 
clothing that will completely protect, and live in the 
rudest dwelling that will fully shelter. All higher wants 
must remain unsatisfied, and the man must become a ma- 
chine, content with the fuel that keeps hirn in motion. 
Here is the chief weakness of the classification, and the 
reason for mentioning it in this connection; to make a 
man a machine is to make him anything but productive. 

"That such a result can never be realized in fact is self- 
evident ; that it should never be conceived of in thought 
is an evidence of how little trouble even the greatest 
writers on political economy have given themselves con- 
cerning the real nature of the being with whose actions 
they deal. If the laborer is an engine, his motive power 
is fuel ; if he is a man, his motive power is hope. It is 
pyschological rather than physiological forces which 



CONSUMPTION OF WEALTH 6 1 

keep him in motion. His will, and not merely his muscle, 
is an economic agent, and he is to be lured, not pushed, in 
the way of productive effort. Ambition may have feeble 
sway in individual cases, but, this side of the gate of 
Dante's Inferno, it is never entirely extinct." — From 
Clark's "Philosophy of Wealth," Chapter III. 

QUESTIONS FOR REVIEW OR DEBATE. 

i. What is the object of all productive effort? 

2. On what does the extent and variety of consumption depend? 

3. Explain how consumption is really the basis of all industry, 

and how production is regulated by it. 

4. What is the difference between private and public con- 

sumption? 

5. Is there any real difference in the primary causes of private 

and public consumption? 

6. What are some of the social and individual effects of con- 

sumption, whether public or private? 

7. Wnat effect has the largeness or smallness of consumption 

on the variety and price of products? 

8. In what way have most of our comforts and conveniences 

first come into use? 

9. Are luxuries to be regarded as wasted wealth? Give reasons 

for your answer. 
10. What is the real test of whether consumption is ''useful" or 
"wasteful" ? 



CHAPTER IX. 



VALUE OR PRICE. 



41. Value and Price are Identical. Value and price 
are two names for the same thing. Both mean, simply, the 
ratio in which commodities, including money, are ex- 
changed for each other or for human service. We often 
speak of value as something different from price. John 
Stuart Mill said that value is the ratio in which things 
will exchange for one another, and price is the ratio in 
which they will exchange for money. For all practical 
purposes this is confusing and unnecessary. The price 
of a thing, it is true, is what it will bring in exchange for 
something else, but if it will bring a dollar in money it 
will bring a dollar's worth of anything else. The ratio 
in which a hat will exchange for wheat, potatoes or corn 
is the same as the ratio in which it will exchange for the 
money price of any of these things. In modern society, 
where money is used, value and price are the same thing. 
In primitive society, where money is not used, value and 
price are not spoken of. It is simply barter, "swapping" 
things. When barter or swapping becomes too incon- 
venient to be practicable, money is used; this furnishes, 
as we have already seen, a common standard article which 
anybody will accept in exchange for what he has to sell, 
because he knows that others will accept it in turn in ex- 
change for what he want's to buy, and so on. Therefore, 
while it is correct enough to speak of the value or price 
of one commodity in some other commodity, as "the value 

62 



VALUE OR PRICE 63 

of a hat is two bushels of wheat," nevertheless, for con- 
venience, when we speak of the value or price of any- 
thing we nearly always mean its value or price in money, 
the commonly accepted instrument or measure of all ex- 
changes. 

42. Value and Utility. Value is a much used and 
misused word, the meaning of which has been unneces- 
sarily confused. For instance, Adam Smith and a great 
many others who have written since speak of two kinds 
of value, "value in use" and "value in exchange." But 
when we speak of "value in use" (meaning the usefulness 
of, say, a coat to the wearer) we are not really talking of 
value at all, any more than we are when we speak of the 
"value" of a friend. That use of the word value has no 
relation whatever to exchange or to price. It relates to 
usefulness, to esteem. One never thinks of trading his 
friend when he speaks of his value. He thinks only of 
his esteem for him. Or, when one speaks of the "value" 
of a fur coat in a blizzard he does not mean its price, he 
means its warmth, its usefulness. When Adam Smitli 
spoke of water as having a high "value in use" but no 
"value in exchange" because it can be had for nothing; 
or the low "value in use" and high "value in exchange" 
of diamonds, he was really making a wrong use of the 
word value. The high value in use of water is simply its 
utility for quenching thirst and irrigating land, and for 
cleanliness. In the same way we may speak of the value 
of sunshine and air and gravitation, when we do not 
mean value at all, but utility, usefulness. If we make a 
clear distinction between the two it will help us very 
much in understanding the subject. 

Value, then, does not mean the quality of a thing but 
the ratio or proportion in which it will exchange for some 
other thing. When cotton cloth cost fifty cents a yard it 



64 OUTLINES OF SOCIAL ECONOMICS 

was no more useful for making sheets and shirts than it 
is now at four cents a yard, but it was more valuable. 
It had a higher price. When steel rails cost $120 a ton 
they were no more useful than when they were sold at 
$18 a ton; in fact, they were not so useful because they 
were not so good; but they were more valuable. They 
had a higher price. It often happens that the usefulness 
of a thing increases while its value or price diminishes. 
Clearly, then, they are not the same thing at all. 

How this value or price is determined is one of the 
most important questions in social economics. We find 
that some things which are very useful, even indispensa- 
ble, like air and sunshine, have no price at all. We get 
them for nothing. And we find other things, like dia- 
monds and gold plate, which are useful in satisfying cer- 
tain desires, but are not indispensable because millions of 
people get along without them, yet have a very high 
price. 

Now, why have diamonds a high value and sunshine no 
value at all ? Clearly it is not because of the difference in 
their usefulness. If it were, sunshine would have an 
enormously higher value. Then what is the reason? It 
is because sunshine costs nothing. It is a free gift of na- 
ture. Diamonds cost a great deal to obtain. Nature is 
very niggardly in supplying diamonds and lavish in sup- 
plying sunshine. Diamonds have a very high price; 
gold has also a very high price, though not so high ; silver 
is less high, and so on down through the multitude of 
articles, until a ton of some things is of less value than 
an ounce of others. Why should there be such dif- 
ferences ? 

43. Supply and Demand. The most usual theory by 
which this is explained is that price is determined by 
supply and demand. This theory holds, first, that the 



VALUE OR PRICE 65 

value of everything rises in proportion as the demand for 
it exceeds the supply, and falls in proportion as the sup- 
ply exceeds the demand ; second, that this rise or fall con- 
tinues until the demand and supply are equal. Sometimes 
this theory appears to be true, but it fails to explain why 
any given commodity has any given price, and does not 
account for the great changes in prices, but only for 
some of their temporary variations. If supply and de- 
mand determined it, when there was an over-supply of an 
article the price would keep falling until all the supply 
was sold, but it does not. Such a thing almost never oc- 
curs, except at a bankruptcy sale. Even in times of panic 
and business depression, while prices do fall they do not 
fall to the point of taking off the whole supply. When a 
merchant has a large supply of goods, part of which he 
cannot sell, does he keep marking down and down and 
down until the last is sold ? Not at all. He marks down, 
until he reaches a certain point, and stops. He will carry 
a large part of his stock over till the next season. Why? 
Because he reaches a point where any further fall of price 
means loss. It gets down to what the article costs him, 
and then he halts. He will borrow money if needs be, to 
carry the stock over, before he. will do as this theory of 
supply and demand says he will, because that would take 
him to bankruptcy. 

The same is true of the price of labor. When there 
are some laborers out of employment is it true that wages 
fall till they are all employed? No. On the contrary, 
though the demand for labor has never been as great as 
the supply for a whole twelvemonth, probably, during 
the entire century, yet wages have kept rising and rising. 
Why is this ? It is because another force has been at work, 
which is altogether stronger than supply and demand, 
namely the cost of production. The laborer's living is 



66 OUTLINES OF SOCIAL ECONOMICS 

more expensive, because he uses more and lives better, 
and so his wages have risen steadily, although the de- 
mand for labor has not increased any faster than the 
supply, and very often not so fast. 

44. What the Law of Value flust Explain. If there 
is any law governing the value, or price, of articles and 
of services, it must be able to explain several essential 
points : 

First, it must explain why any particular article or 
quantity of labor is worth a given sum of money (that 
is, has a certain price) at any given time. If the supply 
of diamonds equals the demand, and the supply of cot- 
ton equals the demand, there is nothing in the supply 
and demand theory to show why diamonds and cotton 
should not have the same value. Clearly, this theory is 
insufficient here. 

Second, it must explain why and how prices change, 
and how far the change will go in either direction, up or 
down. As a part of this, it must explain why the price 
of any article frequently stops falling long before the 
over-supply is sold off; also, why the prices of some 
articles may steadily decline from decade to decade, while 
the relation between the supply of and demand for these 
articles remains practically the same all the time ; and, on 
the other hand, why the prices of other articles, and 
wages of labor, may steadily rise from decade to decade, 
while the supply and demand keep in about the same pro- 
portion to each other. 

Third, it must explain why prices for the same com- 
modities or for the same amount of labor may be very 
much higher in one country than in another, while the 
relation between the demand and supply is practically the 
same in both countries. 

It should be said, here, for the sake of clearness, that 



VALUE OR PRICE 67 

when we speak of demand, in the ordinary sense, we mean 
the demand of those only who actually ask for the given 
article, or can reasonably be expected to ask for it, when 
it is offered, and will pay the price at which the owners 
are willing to sell; we do not mean the unknown desire 
for the article by those who for any reason do not at- 
tempt to buy it. Also, when we speak of supply, we mean 
the commodities or labor actually offered for sale in the 
market; we do not mean the whole possible supply that 
could be offered if all the raw materials were worked up 
into finished products. Briefly, we mean only the actual 
(including the reasonably expected) market demand, and 
the actual (including the proposed or planned) market 
supply. It is important to remember this in seeking the 
true law of value or prices, because it is only this actual 
supply and actual demand that are factors in fixing the 
price of a commodity at any given time. 

In the next chapter we shall see that, while changes in 
the proportion between supply and demand often do 
cause temporary variations in prices, the great controll- 
ing influence that fixes the value or price of commodities 
and of labor and underlies all the important changes, is 
cost of production. It is because sunshine does not cost 
anything that it has no price. It is because diamonds do 
cost a great deal to produce that they have a high price. 
It is because gold costs about thirty-two times as much 
to produce as silver that it is about thirty-two times as 
valuable, even though more gold is being produced than 
silver. When gold only cost sixteen times as much to 
produce as silver, then its value was only sixteen times 
as much, and that is when the much-talked-of ratio of 
"sixteen to one" originated. There is a definite law ac- 
cording to which cost of production determines prices, 
and this we shall study next. 



68 OUTLINES OF SOCIAL ECONOMICS 

SUGGESTED READING. 

In "Principles of Social Economics," Chapters II. and 
III., of Part II. The first of these chapters is on "Eco- 
nomic Value," explaining what it is and showing the dif- 
ference between value and utility. The second chapter 
takes up the theories about value and is entitled : "De- 
mand and Supply Not the Law of Economic Prices. 

Additional References. In Mill's "Principles of Po- 
litical Economy," Chapter II. of Book III., on "Demand 
and Supply, in Their Relation to Value." This chapter 
is suggested because it contains the standard accepted 
statement of the demand and supply theory as presented 
so long a time by the "English-school" economists. 

EXTRACTS FROM READINGS. 

Usefulness and Cost. "That a thing may have any 
value in exchange, two conditions are necessary. It must 
be of some use; that is (as already explained) it must 
conduce to some purpose, satisfy some desire. No. one 
will pay a price, or part with anything which serves some 
of his purposes, to obtain a thing which serves none of 
them. But, secondly, the thing must not only have some 
utility, there must also be some difficulty in its attain- 
ment. 'Any article whatever,' says Mr. De Quincey, 'to 
obtain that artificial sort of value which is meant by ex- 
change value, must begin by offering itself as a means to 
some desirable purpose ; and secondly, even though pos- 
sessing incontestably this preliminary advantage, it will 
never ascend to an exchange value in cases where it can 
be obtained gratuitously and without effort ; of which last 
terms both are necessary as limitations. For often it will 
happen that some desirable object may be obtained grat- 
uitously; stoop, and you gather it at your feet; but still, 



VALUE OR PRICE 69 

because the continued iteration of this stooping exacts a 
laborious effort, very soon it is found, that to gather for 
yourself virtually is not gratuitous. In the vast forests 
of the Canadas, at intervals, wild strawberries may be 
gratuitously gathered by shiploads; yet such is the ex- 
haustion of a stooping posture, and of a labour so mo- 
notonous, that everybody is soon glad to resign the ser- 
vice into mercenary hands.' " — From Mill's "Political 
Economy," Chapter II. of Book III. 



QUESTIONS FOR REVIEW OR DEBATE. 

1. What is meant by the "value" of an article? 

2. Is there any real difference between value and price? Ex- 

plain. 

3. What is barter, and what service does money perform in 

exchange ? 

4. In what way is value different from utility or usefulness? 

5. Give illustrations of commodities that have very high utility 

and low value, and others that have a high value and small 
relative utility. 

6. What is the supply and demand theory of value? 

7. Mention some of the defects of this theory. 

8. What conditions and changes must the true law of value be 

able to explain? 

9. When we are speaking of their influence on value, just what 

do we mean by "demand" and what by "supply"? 
10. What is the real controlling influence that determines prices 
and the changes in prices? Illustrate. 



CHAPTER X. 



COST OF PRODUCTION. 



45. Elements of Cost. Before discussing the relation 
of cost of production to value, we ought to understand 
just what we mean by cost. In economics, the cost of 
producing a commodity includes all the expenses in- 
volved in the whole process, from securing the original 
raw materials down to the final delivery of the finished 
product to the consumer. For example, in the produc- 
tion of wheat bread, scores of different expenses are in- 
curred, — the cost of the seed, the labor of the farmer 
and his men, the miller's charge for grinding, the ex- 
pense of bags and barrels, the service of the railroads and 
steamships in transporting the flour, the time and effort 
of the merchant in storing, selling and delivering the 
flour to the buyer, or the labor of the baker in making it 
up into bread ; and at every stage is added the taxes and 
insurance and repairs which farmer, miller, railroad, 
merchant and baker have to pay in order to carry on their 
respective industries. 

46. Surplus is Not Cost. It is important to note that 
rent of land is not included among the economic costs 
of production ; nor is the interest paid for use of capital ; 
nor is the profit earned by the managers of any of the 
various industries concerned in the process. The reason 
for this is that rent, interest and profits are all forms 
of surplus, left over in the hands of some of the pro- 
ducers after their expenses of production are paid. In 

70 



COST OF PRODUCTION 7 1 

every industry many of the concerns have one or more 
of these forms of surplus left on hand, but there are 
also some concerns which are running very "close to the 
wind/' not earning enough to pay either rent, interest 
or profits. This means that the price of the products is 
only high enough to cover the bare costs of these poorer 
concerns, and, so long as they are needed to help supply 
all that is demanded, the price cannot be lower. Now the 
price of an article, at wholesale, is practically uniform in 
any given market, no matter where the different parts of 
the supply come from, provided of course they are all of 
equally good quality. Therefore, it is clear that the 
necessary price of an article at any given time does not 
include rent, interest or profits; it includes only the 
items of real cost, and these, when we follow them back, 
all turn out to be items of labor and service. 

The cost of the raw materials is, in the first place, the 
expense of the labor to take them out of the earth, mines 
or forests. The cost of manufacturing, transporting, and 
selling the product is the labor of the employees, services 
of managers and salesmen, and generally the expense of 
replacing and repairing machinery, buildings, etc., which 
simply calls for different extra forms of labor, and for 
more raw materials, whose cost we have already seen is 
labor cost. Taxes go to pay for services rendered by 
the government, while insurance is simply a means of 
dividing up the losses from fires and accidents in small 
amounts throughout the business community. 

47. How Profits Arise. Much of this may at first 
seem quite unclear. We all know of cases where farm- 
ers and manufacturers and merchants have to pay rent 
for their land and interest on their capital; in fact, we 
know that the majority do. To them, these are items of 
cost just as much as labor or taxes. But it must be re- 



72 OUTLINES OF SOCIAL ECONOMICS 

membered that we are not now considering the costs in- 
curred by any given producer, but only the case of those 
whose cost of production is just covered by the price they 
receive for the product. These are the producers who 
are not paying or cannot pay rent or interest, and are 
not earning any profits, above the owner's or manager's 
salaries. That is why we say that rent, interest and profits 
are not elements in the price-fixing cost of production, 
whatever they may be to the better managed or located 
concerns that are producing at less than the price-fixing 
cost point. 

In the conclusion of the last chapter it was stated that 
cost of production is the great controlling factor that de- 
termines value or price. Of course, this does not mean 
that the price of each particular article is determined by 
the cost of producing that article, because, as we have 
just seen, the cost is different in the case of each different 
factory or farm, while the price of the product in the 
same market is practically uniform. Prices have a kind 
of fluidity; that is, within the limits of the same market 
they are, under ordinary competition, very much like 
water, as Mr. Mill expressed it; constantly seeking a 
level. They do not always reach that level, and neither 
does water. The swells and breakers of the ocean surface 
make it always uneven, but there is a force constantly at 
work tending to smooth out this unevenness. Wind and 
tide are constantly creating disturbances, but gravitation 
is all the time tending to force each particle of water to 
seek the general level. Hence it is truly said that water, 
if not obstructed by artificial barriers, finds its level. 

This is also true of prices, provided there are no ar- 
bitrary obstructions. Within any given market where 
competition operates there is a constant tendency to- 
wards uniformity of prices for the same article. Speak- 



COST OF PRODUCTION 73 

ing of this tendency David Ricardo, the great English 
economist, said : "There cannot be two prices for the 
same thing in the same market." But this is not strictly 
true ; there are nearly always temporary disturbances. 
There may be two prices for the same article for a little 
while, until the consumers find it out. But it is strictly 
true that there is a constant tendency towards a uniform 
price for the same thing in the same market. 

Of course, then, if the cost of furnishing the different 
portions of the supply to this common market is differ- 
ent, while the price is uniform, some of the producers 
will have a large surplus, divided between rent, interest 
and profits ; others will have a fair surplus, others only a 
very small margin, and still others, whose cost is highest, 
will have no surplus at all. For convenience, the word 
"profit" is often used in the broad sense of surplus, in- 
cluding rent, interest, and profits in the narrower sense 
of the owners' or managers' income. 

Since the cost is different for each different portion of 
the supply, how can cost of production determine what 
this uniform level of prices shall be, for any given com- 
modity? Manifestly, it must be the cost of some special 
portion of the supply that establishes the price level for 
all. The process is as follows : 

Competition between producers, together with the ef- 
forts of consumers to buy at the lowest price, tends to 
force the level of prices downward. This is a common- 
place fact, familiar to everybody. On the other hand, 
the upward resistance to this competitive pressure is cost. 
Suppose, for illustration, the costs of supplying a given 
commodity from different factories to be posts of differ- 
ent lengths under a common platform. We can easily 
see that the platform will be maintained at a height equal 
to that of the longest posts, so long as they are strong 



74 OUTLINES OF SOCIAL ECONOMICS 

enough to hold it up. If a few of the posts are ten feet 
high, and some others only nine, eight and a half and 
seven, the shorter ones will do nothing towards holding 
up the platform. It will rest entirely on the ten-foot 
posts. If for any reason the long posts give way, the 
platform will drop to the level of the next longest ones, 
and so on. 

Now if we will think of these posts as being costs of 
production in as many different concerns, and the plat- 
form as being the level of prices, we will get an idea of 
how the level of prices is held up by costs. Those longest 
posts represent the greatest cost, and the price must at 
least be equal to that cost so long as they remain stand- 
ing. At these points the price and cost meet, and of 
course there is no profit. Those concerns represented by 
the longest posts, or highest cost, hold up the price as 
long as they can. They have no margins of profit. 
Those concerns that produce at less than this largest cost 
represent the shorter posts; they get the same price for 
their product as the dearer producers, and so of course 
have the difference in profits, varying according to their 
respective costs per unit of product, or, in our illustra- 
tion, the lengths of the various posts. 

So we find in every market the price level maintained 
by a few of the dearest producers. In other words, 
prices tend to a level on the basis of cost of production ; 
not the cost of producing each particular article, nor the 
cost of producing the cheapest article, but the cost of 
producing the most expensive part of the supply which 
the market demands. If some of the cheaper producers 
increase their supply so that the dearest group are no 
longer needed, these dearest producers are forced to 
adopt cheaper and better methods of production or else 
they will be crowded out by competition. In either case, 



COST OF PRODUCTION 75 

the price of the product soon falls to the cost level of 
the next dearest group of producers. So, when a manu- 
facturer introduces new and successful machinery, which 
increases his output without much if any increase in his 
cost of production, he reaps an increased profit for a time, 
until his competitors get similar improved machinery or 
until some of the poorer competitors are crowded out of 
the field. Then the price falls again, and the manufac- 
turer no longer gets any special advantage from his ma- 
chine, except that it prevents him from falling behind in 
the race. What was for a time his profit is now being en- 
joyed by the public in the shape of lower prices. 

48 High Cost and Low Cost Production. Of course, 
many factors enter in, to determine whether the cost of 
production in different concerns is high or low. Near- 
ness to supplies and fuel, nearness to market, efficiency 
of machinery, expertness of management and skilfulness 
of labor, all are elements in giving a low cost of produc- 
tion as compared with concerns that have to bring their 
raw materials and coal from a distance, or that have to 
go a long way to find a market, or that use old, slow and 
worn-out machinery, or that are managed by old-fash- 
ioned, illiberal methods and employ a poor grade of labor. 
Right at this point we should correct the very serious 
error that "cheap" labor necessarily means cheap produc- 
tion. We think of low-wage laborers as cheap producers. 
Sometimes these are the very dearest producers; that is, 
the most expensive. The measure of cheapness in labor 
is not always the amount paid per day but the cost of the 
labor per unit of product. If a laborer employed at a 
dollar a day only produces half as much as one employed 
at a dollar and a half, the dollar-a-day man is dearer than 
the dollar-and-a-half man. The dearness or cheapness 
of laborers depends upon the cost of the labor necessary 



y6 OUTLINES OF SOCIAL ECONOMICS 

to turn out a given quantity of product. If everything 
were clone by hand it would generally be true that low- 
paid laborers would be cheap producers, but the great 
cheapening power in production is not muscle but machin- 
ery. The productiveness of human muscle can never be 
increased very much. The fifteen-cent-a-day Japanese and 
ten-cent-a-day Chinaman are as dexterous and expert 
with their fingers as the average three-dollar-a-day 
American. The difference in this respect is very limited. 
The great gain in productive power comes from the use 
of science and machinery. 

For instance, fifty years ago a weaver could attend to 
only two looms. Some weavers would do a little more 
with two looms than others, but the best could not do 
twice as much as the poorest. These looms would only 
make about sixty to seventy-five revolutions a minute. 
With the improved machinery used to-day some weavers 
can mind twenty and even more than twenty looms, run- 
ning at the rate of two hundred and twenty revolutions a 
minute. This is a reduction in the cost which no amount 
of hand dexterity could ever produce. 

This leads directly to the greatest of all reasons why 
low-wage labor is really dearer than high-wage labor; 
namely, the fact that high wages make a large market for 
products, and it is only when there is a large market that 
machinery and other cheapening processes can be used in 
the production of wealth. This point was emphasized, 
it will be remembered, in the lesson on "Causes of Pro- 
duction." Twenty looms minded by one operator and 
making two hundred and twenty revolutions a minute 
will produce one thousand yards of cloth a day, which 
is about twenty times more than the weaver of fifty years 
ago could produce. Of course, the use of such looms can 
only be made profitable if this immensely increased prod- 



COST OF PRODUCTION • JJ 

uct of cloth can be sold. The poorer the working people of 
the country, are — that is, the lower their wages — the less 
they can buy of the cloth, and hence the less they can con- 
tribute toward making this improved machinery possible. 
Large consumption, which nearly always depends upon 
high wages, except in the case of luxuries sold to the 
rich, is necessary to the development and profitable use 
of the most economic and cheapest methods of produc- 
tion. In the long run this is always true. 

The forces which give lower prices, then, are not 
merely the forces which develop the dexterity of human 
muscle but are chiefly the forces which bring improved 
machinery and productive methods into use. These forces 
are not physical but social. They arise not out of the 
laborer's personal endurance and excessive drudgery, but 
out of his social refinement, education, high standards of 
life and large consumption, all of which result in high 
wages. The continuous lowering of prices, which means 
cheapening of wealth for everybody, comes not through 
low wages but through larger use of machinery, and this 
results from the increasing demand for an increasing va- 
riety of products by the community. In other words, 
this demand comes chiefly from a higher standard of so- 
cial life among the wage-earning people. 

SUGGESTED READING. 

In "Principles of Social Economics," Chapters IV. and 
V of Part II. These chapters are entitled respectively 
"The Law of Economic Prices" and "The Law of Cost 
of Production." and explain in more detail the points we 
have just covered. 

Additional References. In David Ricardo's "Princi- 
ples of Political Economy and Taxation," Chapter XXX., 
"On the Influence of Demand and Supply on Prices." 



78 OUTLINES OF SOCIAL ECONOMICS 

Mr. Ricardo, whose "Political Economy" was published 
in 1817, was practically the only great English economist 
to deny the demand and supply theory and assert that 
prices are governed by cost of production, but even he 
did not see the full application and wide scope of his 
doctrine. Some of his reasoning as to how cost of pro- 
duction is determined has been discarded in the light of 
later economic investigations. 

In Mill's "Principles of Political Economy," Chapter 
III. of Book III. Although Mill was the strongest of all 
defenders of the supply and demand theory, he recog- 
nized the influence of cost of production in determining 
prices under certain conditions. This chapter treats "Of 
Cost of Production, in Its Relation to Value." 

EXTRACTS FROM READINGS. 

Cost, Not Quantity, Determines Value. "It is the cost 
of production which must ultimately regulate the price of 
commodities, and not, as has been often said, the propor- 
tion between supply and demand; the proportion 
between supply and demand may, indeed, for a time, 
affect the market value of a commodity, until it is sup- 
plied in greater or less abundance, according as the de- 
mand may have increased or diminished; but this effect 
will be only of temporary duration. 

"Diminish the cost of production of hats, and their 
price will ultimately fall to their new natural price, al- 
though the demand should be doubled, trebled, or quad- 
rupled. Diminish the cost of subsistence of men, by di- 
minishing the natural price of the food and clothing, by 
which life is sustained, and wages will ultimately fall, 
notwithstanding that the demand for laborers may very 
greatly increase." — From Ricardo's "Political Economy 
and Taxation," Chapter XXX. 



COST OF PRODUCTION 79 

The Tendency of Value to Equal Cost. "Adam Smith 
and Ricardo have called that value of a thing which is 
proportional to its cost of production, its Natural Value 
(or its Natural Price). They meant by this, the point 
about which the value oscillates, and to which it always 
tends to return; the centre value, towards which, as 
Adam Smith expresses it, the market value of a thing is 
constantly gravitating; and any deviation from which is 
but a temporary irregularity, which, the moment it ex- 
ists, sets forces in motion tending to correct it. On an 
average of years sufficient to enable the oscillations on 
one side of the central line to be compensated by those 
on the other, the market value agrees with the natural 
value ; but it very seldom coincides exactly with it at any 
particular time. The sea everywhere tends to a level ; but 
it never is at an exact level ; its surface is always ruffled 
by waves, and often agitated by storms. It is enough that 
no point, at least in the open sea, is permanently higher 
than another. Each place is alternately elevated and de- 
pressed ; but the ocean preserves its level. . . . 

"To recapitulate : demand and supply govern the value 
of all things which cannot be indefinitely increased; ex- 
cept that even for them, when produced by industry, 
there is a minimum value, determined by the cost of pro- 
duction. But in all things which admit of indefinite 
multiplication, demand and supply only determine the 
perturbations of value, during a period which cannot ex- 
ceed the length of time necessary for altering the supply. 
While thus ruling the oscillations of value, they them- 
selves obey a superior force, which makes value gravitate 
towards Cost of Production, and which would settle it 
and keep it there, if fresh disturbing influences were not 
continually arising to make it again deviate. To pursue 
the same strain of metaphor, demand and supply always 



80 OUTLINES OF SOCIAL ECONOMICS 

rush to an equilibrium, but the condition of stable equi- 
librium is when things exchange for each other according 
to their cost of production, or, in the expression we have 
used, when things are at their Natural Value." — From 
Mill's "Principles of Political Economy," Chapter III. 
of Book III. 

QUESTIONS FOR REVIEW OR DEBATE. 

i. Name some of the elements in the economic cost of pro- 
ducing a commodity. 

2. Why are not rent, interest and profits included in our reck- 

oning of economic costs. 

3. When we trace back the various items of real cost, into 

what one form of cost do they resolve themselves? Il- 
lustrate. 

4. Explain how some industries have an economic surplus. 

including rent, interest and profits, while others do not. 

5. Since we know that rent and interest are items of cost to 

some producers, in what sense do we mean that they are 
not part of the economic cost of production? 

6. What is the general tendency of prices in the same market? 

What can you say of the variations from this tendency? 

7. Explain just how cost of production determines prices. Is 

it the cost of each particular article or of some definite 
part of the whole supply ? If the latter, what part is it, 
and why? 

8. How does competition affect prices? What is the effect 

of improved machinery and better methods of produc- 
tion? 

9. What are some of the conditions that cause high and low 

cost of production, respectively? 
10. Why is low-wage labor in the long run the most costly 
of all labor? Explain just how the use of improved 
machinery, giving cheap production, finally depends on 
a high level of wages throughout the community. 



CHAPTER XI. 



DISTRIBUTION OF WEALTH. 



49. What Distribution Means. Distribution is some- 
times spoken of as if it meant the transportation and 
selling of goods. What is meant by distribution in eco- 
nomics is the division of wealth among the various fac- 
tors that share in its production. There are really but 
four economic avenues or channels by which wealth is 
distributed throughout the community. They are wages 
(including salaries), rent, interest and profits. Every- 
body, except those supported by charity, gets his or her 
income and share of the wealth produced in one of those 
forms. 

50. Wages. Wages are a definite kind of income, dif- 
ferent in character from either rent, interest or profit. 
Wages are often spoken of as if they meant any and 
every kind of reward for labor. This is a mistake. If a 
man plants a hill of potatoes the product is the reward for 
his labor, but it is not wages. It is simply wealth he has 
helped produce. Wages are a specific agreed sum paid by 
one person to another for a certain amount of service. 
Wages are the price of labor, and are always a definite 
stipulated income. They are not an uncertain variable in- 
come, depending for their amount on the success or 
otherwise of the industry. They are a definite sum 
agreed upon before the service is rendered, and must be 
paid if the business is to be carried on at all, because the 
laborer must at least be fed before he can work. All 

81 



82 OUTLINES OF SOCIAL ECONOMICS 

forms of stipulated income paid for services may be 
properly classed as wages. Moreover, wages are nearly 
always a part of the cost of production, because all pro- 
duction involves labor and under modern conditions 
practically all labor is performed for wages. Conse- 
quently wages are never a division of profits, because 
profits are the surplus remaining after all costs are paid. 
51. Rent, Interest and Profits. Rent is different 
from wages in that it is not a necessary part of the cost 
of production. There is a good deal of production that 
does not involve rent-paying at all. Rent is a part of the 
surplus or profit arising from the use of land, just as in- 
terest is a part of the surplus arising from the use of capi- 
tal. If a producer owned all the land he used and all the 
capital invested in his business, there would be neither 
rent nor interest to pay. He might pay wages, or if he did 
the work himself his own cost of living would constitute 
the labor cost equivalent to wages. All the remaining 
value of the product above what it costs to produce it 
would be his profits. If he did not own the land but did 
own the capital he would then have to pay, first, wages 
for the labor, and out of the remaining profits he would 
have to pay a part for rent of land. The surplus created 
by any special fertility or advantageousness of the land 
he uses is paid to the landowner for the use of it, and is 
called rent. If he does not own the capital he uses he 
then has to pay interest for borrowed capital, and thus 
his profits are still further reduced by the amount paid 
for interest. If anything is left after paying wages, rent 
and interest, it is his profits. If the total surplus is no 
more than equal to the rent and interest, he will have no 
profits, as very often happens. Thus it may be said that 
wages are a stipulated amount paid for labor, rent is a 
stipulated amount paid for the use of land, interest is a 



DISTRIBUTION OF WEALTH 83 

stipulated amount paid for the use of capital, and profits 
are the possible surplus left after everything else is paid. 
It should not be forgotten, however, that rent and in- 
terest, while stipulated in amount, are not always ele- 
ments in cost of production, while wages, or labor cost in 
some form, are always an element. There is no produc- 
tion without paying the labor cost in some way or other, 
almost always in wages. Rent and interest are payments 
out of the surplus or profit. 

If, for instance ,a farmer wants a piece of land, and 
the owner asks ten dollars an acre for the use of it, the 
farmer will only pay ten dollars provided he can clear 
that much or more by using it. If he cannot realize 
from the product of the land above all costs more than 
ten dollars he will refuse to take it at that rent. If he 
can realize fifteen dollars he will gladly pay ten or even 
twelve dollars as rent, but he will not pay sixteen dollars, 
because that would be giving more than the gain obtained 
by using the land. In other words, rent is a part of the 
surplus created by a given piece of land, and is paid by 
those who use it to those who own it. Sometimes all the 
surplus coming directly from the land is paid in rent, 
sometimes only a part of it, but of course more than the 
surplus will not be continuously paid. 

Interest is exactly like rent, only it is paid for the use 
of capital, such as machinery, tools, stock, etc., but a per- 
son will pay interest for capital to use in business only 
on condition that he can make more than the interest by 
so doing. If new capital will not increase his remainder 
of profit he will refuse to use it, but in some industries, 
like bonanza gold mining, very high rates of interest are 
paid because large margins of profits are realized. In- 
terest is generally higher in this country than in Europe, 
because profits are usually larger here than abroad. 



84 OUTLINES OF SOCIAL ECONOMICS 

Rent and interest, therefore, are divisions of the total 
gain among the owners of borrowed land and borrowed 
capital. The remainder goes to those who conduct the 
industry, to the extent that the total profits are larger 
than the amount due for rent and interest. To illustrate : 
if a business will yield 15 per cent, surplus, and the person 
conducting it owns both the land and capital employed, 
then he will have the total profit of 15 per cent. If he 
owns only the capital but has to hire the land at a rent - 
equal to one-third of his surplus he will have only a profit 
of 10 per cent. If he also borrows his capital and has to 
pay another third of his surplus in interest, he will only 
have 5 per cent, profit left. 

Rent and interest are not parts of the cost of pro- 
duction, which affect the price of the commodity, but are 
a portion of the general surplus or profit. In other words, 
wages or labor expense are cost of production ; rent, in- 
terest and profits are surplus. They may all go to one 
person or be divided among many, according as the land 
and capital employed is owned by one or by different 
people, but if the latter the total gains or surplus created 
by the industry will be divided among these three. It may 
all go to rent and interest and leave no profits, or it may 
go equally to all three, but there will never be profits 
without first paying the rent and interest, though there 
may be rent and interest without any profits. Rent, inter- 
est and profits are divisions of the surplus created by 
the quality of the land, and by the use of capital, and 
by the skilful management of the business. 

SUGGESTED READING. 

In "Principles of Social Economics," Chapter I. of 
Part III., on "The Distribution of Wealth." In this chap- 
ter special attention is devoted to showing the order in 



DISTRIBUTION OF WEALTH 85 

which wealth is distributed through the four economic 
channels; first wages, then rent and interest, lastly 
profits. 

For Additional References see subsequent chapters, on 
Wages, Rent, Interest and Profits, respectively. 

QUESTIONS FOR REVIEW OR DEBATE. 

1. What is the economic meaning of "distribution" of wealth? 

2. How many channels of economic distribution are there? 

What are they? 

3. Define wages. What other form of income does the term 

wages, in economics, include? 

4. Do wages always include all labor cost? If not, what forms 

of labor cost are not represented by wages? 

5. What is rent? How does it differ from wages? 

6. For what is interest paid? How does it differ from wages, 

and wherein is it similar to rent? 

7. Define profits. What is the difference between general or 

total profits (or "surplus") and the employer's, final prof- 
its? 

8. In what order is wealth distributed through these four chan- 

nels? 

9. Explain by illustrations how the method of distribution 

varies according to the ownership of the land and capital 
used. 
to. Why are wages the first and unavoidable item of distribution, 
while rent and interest are uncertain, and profits wholly 
dependent on the success of the business? 



CHAPTER XII. 

WAGES. 

52. Wages an Index of Civilization. Wages and 
salaries are the forms of wealth-distribution through 
which the great majority of the community receive their 
income, especially in modern countries. The class whose 
income reaches them in this way is constantly increasing 
as civilization advances. Strictly speaking, wages are a 
stipulated amount paid for services. It may be by the 
day, week, month or year, only when it is by the year 
it. is called salary, and is usually larger in total amount. 
Wages in the broad sense include all stipulated amounts 
paid for services. They are the price of labor. 

Since wages are the means by which the laboring class 
secures command over the necessities, comforts, con- 
veniences and luxuries of life, it is clear that the stand- 
ard of wages is a very good sign of the material and 
social condition of the people of any nation. Whatever 
else may be said of a nation, if wages are low the masses 
of the people are sure to be poor, and if the people are 
poor civilization is backward. There is no more reliable 
general index to a nation's welfare and progress than 
the wage conditions of its people, and nothing more 
surely contributes to a people's progress than a general 
permanent rise of real wages, although there are many 
other things that affect their welfare in various ways. 

53. Real and Nominal Wages. From the laborer's 
standpoint, the mere amount of money he earns does not 

86 



WAGES 87 

prove whether his wages are relatively high or low ; it de- 
pends on what and how much he can buy, with his wages. 
For instance, when wages were $10 or $15 a day in the 
Klondike gold fields, prices of ordinary necessities were 
so very high that the laborer was unable to buy as much 
with his money as a New England factory operative on 
$1.50 or $2 a day could with his. Therefore, we make 
a distinction between the money rate of wages and the 
purchasing power of the laborer's earnings. The amount 
received in money is his "nominal wages ;" the amount of 
commodities or whatever he can buy with his money in- 
come is his "real wages." When we are considering 
wages as an item in cost of production we can take ac- 
count only of the nominal or money wages, but when we 
speak of wages as a measure of the workingmairs wel- 
fare or standard of living or advancement in civilization 
we mean, of course, real wages. 

54. Standard of Living. How are wages, or the 
"price of labor," determined? By the operation of the 
same principle of cost that determines the prices of com- 
modities. The influences that operate upon a manufac- 
turer in compelling him to demand a certain price for his 
output operate upon laborers in compelling them to 
demand a certain price for their labor. In the case of 
a manufacturer it is the expense involved in furnishing 
the product that fixes the minimum level of price at 
which he can afford to sell. In the case of laborers it is 
the normal, customary and established expense of living 
that furnishes the basis of their demand for wages. 

This is not always understood by the laborers them- 
selves, but, like the silent operation of forces in nature, 
it is an unconscious fact that is ever present and finally 
decides the result. In other words, what it has become 
necessary for the laborers to have, according to the social 



88 OUTLINES OF SOCIAL ECONOMICS 

conditions under which they live, constitutes the real 
force of their demand and the measure of the amount of 
their wages. Laborers in China will seldom get more than 
ten or twelve cents a day, because the material and social 
requirements under which they live can be satisfied with 
the meager supply that ten or twelve cents a day will fur- 
nish. In more advanced countries this amount is not only 
inadequate but it is so far short of fulfilling the living- 
necessities that even employers do not think of offering 
it. The standard of life, for instance, in England and 
the United States has advanced so far that no industry 
could exist at all, whose life depended upon paying ten 
cents a day for labor. The thought would be dismissed 
as impossible; in fact, it becomes a part of the primary 
estimates of a business, before it is started, that it must 
be able at least to pay the scale of wages that the estab- 
lished standards of living of the country demands. If 
it is in a community or industry that requires five dollars 
a day to be paid, as in some cases in the United States, a 
new business will only be established if its prospects will 
afford that, but if it is an industry or community where 
twenty-five cents a day can be paid, the business will be 
started on that basis. 

Whether the wages are twenty-five cents a day, or 
two, three or five dollars a day, is not determined by the 
desire of the capitalists to pay more or less. They will 
nearly always pay the least they. can. The wages are 
determined by the necessary expensiveness of the labor- 
ing class in that country or community ; in other words, 
by the minimum amount the established standard of liv- 
ing requires in order to continue. 

55. Influences that Affect Wages. Clearly, then, 
wages are affected by whatever influences affect the 
tastes and habits of the laboring class, because the expen- 



WAGES 89 

siveness of labor is governed by the laborers' standard 
of living. Where they are content and can live under 
conditions that compel them to eat and sleep and cook 
in the same room, they can with comparative ease be in- 
duced to accept low wages that will cover that sort of 
living. But where the laborers' social and domestic 
habits, education and standards of life are such that they 
refuse to eat and sleep in the same room, refuse to live 
under conditions where they cannot have decent housing 
and sanitation, carpets and modern furniture and some 
literature and social entertainment, they will not forego 
these without discontent, strikes and disturbance, and 
cannot be induced to work for wages that will not supply 
these conditions. This difference in habitual tastes and 
desires makes the difference in rates of wages. Nothing 
but habitual acceptance of lower conditions can establish 
low wages, and nothing but the education and social re- 
finement which demands better conditions can exact high 
wages. All the influences, therefore, of education, social 
opportunity, varied experience/ cultivation of new ideas 
and tastes, are forces which push wages upward. 

In short, all the influences which awaken the mind, 
sharpen the ideas, refine the tastes, cultivate the manners, 
vary the experience and broaden the life of the citizen, 
make irresistibly for a higher plane of wages. On the 
other hand, anything and everything which tends to re- 
press new aspirations and opportunities for seeing new 
things and people, undergoing new experiences, or having 
new desires, tends to either stop the rise or cause a fall 
in wages. If it were possible to make American laborers 
as contented with a cotton smock, wooden shoes, rice and 
chopsticks as are the hundreds of millions in China, it 
would be just as easy to pay the Chinese rates of wages. 
And, if it were possible to make the average Chinaman 



90 OUTLINES OF SOCIAL ECONOMICS 

insist upon a variety of clothing, some furniture, and the 
ordinary features that enter into the life of the American 
citizen, it would not be difficult to raise his wages to the 
American level ; in fact, it would be impossible to keep 
them much below. 

56. Rffect of Charity on Wages. In accordance 
with this general principle, nearly all forms of charity, 
tips and perquisites, or special privileges in any form, if 
they are at all general, have the effect of lowering wages. 
There is no class in the community among whom any of 
these forms of regular charitable aid are given where 
wages are not correspondingly lower. It is a custom in 
some places, quite common in England and other Eu- 
ropean countries and in some parts of this country, to 
give in addition to wages certain privileges, like the use 
of a small piece of land, the right to keep a pig or a cow, 
or the right to accept fees and tips. In every such in- 
stance, whether it be the waiters and barbers and livery- 
men who receive tips, laborers who receive a pig and 
cow, or public officials who receive fees, the wages or 
salaries are lower than in similar occupations where these 
"extras" are not allowed. 

In the eighteenth century in England it became a cus- 
tom (which finally had the force of law) to grant parish 
(pauper) allowances to laborers when the price of bread 
rose above a certain point. The natural way to have met 
this, in accordance with the true principle of wages, 
would have been to raise wages when the cost of living 
rose. But this was contrary to the notion of those who 
paid wages ; the employers, acting as public officials, 
fixed the wages twice a year by law and proclamation, 
and, being taxpayers as well, had to supply the difference 
in pauper allowances. In other words, when they made 
the wages inflexible and fixed, by law, they were forced 



WAGES 91 

to supply a charitable addition varying with the cost of 
living. If they had withheld the charity then the wages 
would have varied, but the variation of the one or the 
other along with the cost of living was certain to occur. 
The proof of this came when the habit of piecing out 
wages with parish allowances was finally prohibited. 
Wages immediately went up, by the whole, and very soon 
more than the whole difference. This same principle 
operates wherever wages or stated incomes exist. Any 
form of gratuity given to laborers, if it becomes at all 
general, finally operates to reduce their wages. 

SUGGESTED READING. 

In "Principles of Social Economics," Chapter III. of 
Part III., as far as the second paragraph on page 208. 
This chapter is on "The Law of Wages," and the portion 
given states the test of a scientific law of wages, defines 
wages, and explains in detail the influence of the stand- 
ard of living in determining wage rates. 

Additional References. , In Gunton's "Wealth and 
Progress," Sections I. and II. of Chapter I., Part II., dis- 
cussing respectively the old "wages-fund" theory and Dr. 
Francis A. Walker's theory of how wages are deter- 
mined ; also, the whole of Chapter II., Part II. "Wealth 
and Progress" is devoted entirely to a critical examina- 
tion of the wages question, and this latter chapter defines 
wages, explains nominal and real wages, the economic 
law of wages, standard of living and cost of living. 

In Marshall's "Economics of Industry," Chapters III., 
IV. and V. of Book VI., all three chapters being on "De- 
mand and Supply in Relation to Labor." Prof. Marshall 
does not advance any very definite law of wages, but 
makes many interesting comments on systems of pay- 
ments, kinds of employment, supplementary wages, etc. 



92 OUTLINES OF SOCIAL ECONOMICS 

In Hadley's "Economics," Chapter X., on "Wages," 
and in Francis A. Walker's "Wages Question," Chapter 
IX. of Part I. Both these chapters are chiefly devoted 
to exposing the errors of the "wages-fund" theory. 
Chapter VI., in Book L, of Walker's "Wages Question," 
might well be read because of its refutation of the famous 
but discouraging doctrine of Malthus, a century ago, that 
population all the time tends to increase faster than the 
means of subsistence. A photograph and sketch of Mal- 
thus may be found in G union's Magazine for September, 
1898. 

In Sir Thomas Brassey's "Work and Wages," Chap- 
ter III., entitled "Cost of Labor Cannot be Determined 
by the Rate of Wages." This is devoted to showing that 
high wages do not necessarily mean high labor cost, in 
reckoning the costs of production in an industry; and 
incidentally illustrating the relation of standard of living 
to wages. 

EXTRACT FROM READINGS. 

Wages Fund a Myth. "As has been shown in a 
former chapter, wages are really paid out of current pro- 
duction, and not out of capital, as the wage-fund theory 
assumes. Granting, for the moment, that wages are 
wholly advanced out of capital to supply the immediate 
necessities of the laborer, I have, I think, abundantly 
proved that the two questions, whether labor shall be 
employed at all, and, secondly, what wages shall be paid 
to laborers if employed, are decided by reference to pro- 
duction and not to capital. It is the prospect of a profit 
in production which determines the employer to hire la- 
borers; it is the anticipated value of the product which 
determines how much he can pay them. The product, 
then, and not capital, furnishes at once the motive to 



WAGES 93 

employment and the measure of wages. If this be so, the 
whole wage-fund theory falls, for it is built on the as- 
sumption that capital furnishes the measure of wages ; 
that the wage-fund is no larger because capital is no 
larger, and that the only way to increase the aggregate 
amount which can be paid in wages is to increase capital. 
But, as matter of fact, wages are not wholly advanced by 
capital, but are paid out of the product of the labor for 
which wages are due, as has been shown in the preceding 
chapter. This alone, which is indisputable, invalidates 
the theory we are considering." — From Francis A. 
Walker's "Wages Question," Chapter IX., Part I. 

QUESTIONS FOR REVIEW OR DEBATE. 

i. In what form do the majority of the people in modern coun- 
tries receive their incomes? 
2. Why are wage rates among the best indications of a nation's 
state of civilization? 

3. Explain the difference between real and nominal wages. 

4. What is meant by the standard of living? 

5. Why and how does the standard of living determine wage 

rates? Illustrate by the experience of different countries. 

6. What are some of the influences that affect the standard of 

living, and hence wage rates? 

7. What is the effect of charitable or "extra" items of income 

on wage rates? Why is this? 

8. Give illustrations of the effect of tips, fees, pauper allowances, 

etc., on wages. 



CHAPTER XIII. 

wages — Continued. 

57. Piece=Work. Piece-work is a system under 
which laborers are paid according to the quantity of 
work done instead of according to the time worked. It 
has gradually come into vogue with the capitalist system 
of production. There are many reasons which have con- 
tributed to its adoption in certain industries, especially 
factories and machine shops. It is believed by many that 
under piece-work the laborers' reward is more equitable. 
It is assumed with great confidence that under piece- 
work every laborer gets what he earns. If he works 
harder and does twice as much or a third more under 
this system he is supposed to get twice as much or a third 
more pay. 

Although this view is honestly held, it is far from being 
entirely true. It would at first sight seem as if, for in- 
stance, when shoemakers are paid by the quantity of 
work done, it would make no difference to the employer 
how many pairs a man made. If he doubled his output 
by any ingenious contrivance or special energy or skill, 
his wages would presumably increase by the full amount 
of the increase of his product. But that is contrary to the 
history of piece-work wages. The theory would be true 
if the wages w r ere really paid in proportion to the work 
done, but they are not. The real force that finally oper- 
ates to detemine wages, as explained in the last chapter, 
is the cost or standard of living among the wage class. 

94 



WAGES 95 

Of course, there are individual exceptions to this, just as 
there are to the cost basis of all prices, and just as there 
are variations and disturbances in the operation of every 
natural law, but the great steady influence underlying 
prices is cost of production, and underlying wages, cost 
of living. A very little observation of the facts in any 
industry where there is any considerable change in the 
methods of production will show that piece-work wages 
are really governed by the same principle as regular time 
wages. 

58. How Piece=Work Wages Are Determined. The 
truth is, as every workingman knows, the piece-work 
price in any shop or factory is finally fixed by the average 
earnings of the time or day workers in the same business. 
In other words, the price per unit of product, whether by 
the ton, dozen or yard, is fixed with the view of making 
the total earnings of the day of week as nearly equal to 
the time earnings as possible. The differences in the 
energy and skill of the workers cause the actual earnings 
to fluctuate around this line. As an illustration, take the 
case of any workshop where a new machine is intro- 
duced. Whether it is in printing, shoemaking, iron-work 
or whatever, it is an absolute rule that when a new ma- 
chine that produces a great deal more than the old is 
brought in the price paid to the laborer per unit of pro- 
duct is reduced. For instance, with the latest improved 
looms that are now being introduced in the southern cot- 
ton mills the weaver can operate double the number and 
hence produce double the quantity of cloth, and the price 
paid for weaving fifty yards is only a little more than 
half what it is on the old looms. 

This is not necessarily unjust. There is no just reason 
why all the benefits of a new machine should go to the 
laborer who happens to work at it. He did nothing to 



g6 OUTLINES OF SOCIAL ECONOMICS 

invent it. He took none of the risk and expense of ex- 
perimenting with it, nor of the larger investment of capi- 
tal necessary to instal it. If the price paid the laborer 
per unit of product remained the same the public at large 
would never get any benefit from the improvements. 
Prices could not fall, capital could get nothing for its 
risks and losses, and the few workmen who did receive 
the gain would probably be demoralized by the sudden 
extraordinary increase of income. But the universal 
principle which tends to make piece-workers' wages like 
those of day-workers, according to the standard of living, 
distributes the benefit of improvements throughout the. 
whole community. It goes partly to the consumers in the 
lower prices of products, partly to the capitalists, tem- 
porarily, in larger profits, and partly to the laborers who 
operate the machines, in some increase of total earnings 
even at the reduced piece-rate. 

This fact, that piece-work wages tend to equal the day 
earnings, in the long run, prevents the piece-work system 
from always inspiring the laborers to the highest energy 
and competition that employers expect. By long experi- 
ence laborers have learned that if a few in a shop work 
unusually hard and produce an unusually large amount, 
that fact will often be made the basis of reducing the rate 
of pay in the shop. It will be seen that these few earn 
more! than t)he formal standard, and from this it will be 
assumed that the rest could do the same if they tried, and 
so the piece-work prices will be lowered. That is the 
real reason why trade unions have so often made it a 
rule, which is so much criticized and censured, to limit 
the amount of work the members shall do in a day. This 
tendency has arisen among the trade unions because em- 
ployers so frequently base the piece-rate for a whole shop 
on the earnings of a certain number of the hardest 



WAGES 97 

workers, sometimes not scrupling to give these few an 
extra bonus to turn out a large product. This means 
that the rate of labor for all must be at the very highest 
notch in order to earn even average day wages. The 
trade unions are familiar with this, and so they try to 
check it by fixing a limit to the piece-work product per 
day. They realize that otherwise they would be pitted 
against each other like racehorses, and so in the long run 
be forced to very exhaustive labor with no more pay. 

59. Women's Wages. Piece-work has many excel- 
lent features, but it is not necessarily a means of earn- 
ing higher wages ; that is determined in the long run by 
other conditions, as we have seen. One of the advan- 
tages of piece-work is that it destroys the discrimination 
against women in the rate of wages. Under piece-work, 
employers are practically obliged to pay women the same 
rate of wages as men. Wherever piece-work prevails, 
men and women who work at the same employment get 
practically the same wages ; at least, the same piece-rate. 
It is a common thing, among weavers in cotton, silk and 
woolen mills, for some women to earn more than some 
men, although that is not the rule. 

But, curiously enough, piece-work operates in another 
way to separate employments into men's work and 
women's work. That is to say, where the work is of a 
kind that women can do equally as well as men, men are 
gradually dropped out altogether and it becomes a 
"woman's job," so much so that women even get to dis- 
like seeing a man doing it, and vice versa. The reason is 
the same that operates in leveling piece-work rates to the 
day-work wages ; namely, the effort to base the total 
earnings on the cost or standard of living of the workers. 
With women this is less than with men, and hence a 
lower piece-rate can be paid on what is exclusively 



98 OUTLINES OF SOCIAL ECONOMICS 

woman's work, just as the day rate for women is nearly 
always lower than for men. 

That women's cost of living, all included, is less than 
men's, is so thoroughly recognized that in many places 
(in factory towns it is a rule) the price of board for 
women is lower than that for men. Moreover, women de- 
pend largely on other people for a portion of their ex- 
penses. They depend on their parents or brothers or 
young men friends for most of their social enjoyments, 
entertainments, presents, etc., and these are sufficiently 
important and continuous items to make a marked differ- 
ence in their general regular expenses. Then, too, 
women are very much less often responsible for family 
support than men. Except in the case of widows, women 
rarely have to supply the income of a whole family. Sta- 
tistics show that working women represent only about 
one and one-half dependent persons to each worker, 
whereas each workingman represents an average of 
more than three dependent persons. Since the cost of 
living includes not merely the personal expenses of the 
individual, but also of those dependent on him, as indi- 
cated by the family, the average man's expense is much 
greater than the woman's. 

60. Family Expenses the Basis of Wages. Work- 
ing women are usually single, and are generally members 
of families. Being thus partly supported by the family 
income, their earnings can be and are much less than 
what would be required for full support. 

Likewise, the head of the house in turn usually earns 
less when the family income is pieced out by the small 
wages of the women and children. In other words, the 
forces governing wages steadily work toward the point 
of basing the total income on the family cost or standard 
of living. 



WAGES 99 

The income of the family must be not merely enough 
to support the worker, but also the dependent non- 
workers. The general rule is that when only the man 
works his wages are based on this average family ex- 
pense, but when the wife and children also work each 
earns less, so that the total income rarely exceeds the nor- 
mal standard of living of families in the same social 
group. 

61. Country and City Wages. The difference be- 
tween country and city wages for the same class of 
workers is determined in the same way. The standard 
of living in the country requires much less expense than 
in the city, and therefore wages are lower in the rural 
districts and higher in the cities. Part of this cheaper 
cost is due to lower rents and cheaper provisions, but 
very largely it is because in the country a smaller and 
poorer variety of commodities are consumed than in the 
city. Less is usually spent on good clothing, on newspa- 
pers and magazines, on travel and amusements, on pic- 
tures and music and furniture and various sundries, be- 
cause the social life and contact between people is less. 
People demand these extra comforts, conveniences and 
artistic products largely in proportion as they see them 
in customary use by acquaintances, neighbors and 
friends, and naturally there is less of this sort of incen- 
tive in the country than in the city. Both the cost and 
the standard of living 'are lower, and therefore wages 
are lower. 

62. Wages Fixed by Groups, Not Individuals. Wage 
rates are determined by the standard of living of groups 
of families, not of each separate household. Wages are 
different for different kinds of employment according to 
the standards of living of the groups of workers that 
seek these various occupations, and the pay is uniform 

LofC, 



IOO OUTLINES OF SOCIAL ECONOMICS 

for the same work. For instance, the price for weaving 
cloth is a fixed amount for all weavers, the price for peg- 
ging shoes in shoe factories is uniform, and so for all 
forms of labor, whether skilled or unskilled. The wage 
rate for carpentering or plumbing or bricklaying is a 
standard price for that work for the whole of each group 
or trade in each locality. 

But of course the standards of living of different fam- 
ilies within each of these groups are not all the same. 
How, then, is the standard for the group, on which 
wages are based, determined? In the same way as the 
prices of commodities are determined, — by the cost of 
the dearest portion.* In the case of prices, it is the cost of 
producing the dearest portion of the required supply; in 
the case of wages, it is the cost or standard of living of 
the most expensive portion of each group of laborers that 
determines the wages for the group. This dearest por- 
tion is composed of the families in that group who, either 
through higher tastes or more expensive habits or larger 
families, have the most costly standard of living in the 
group. 

Suppose, for instance, a group of workingmen consists 
of a thousand men, and two hundred of them represent 
families whose habitual customary expenses are $15 a 
week. The pressure from those two hundred would be 
to force a wage rate of at least $15 a week, and perhaps 
start a strike if wages fell below that point. The effect of 
the requirements and perhaps efforts of these two hun- 
dred most expensive families is to keep the wage stand- 
ard up to $15. But of course the cost of living of all 
of the laborers in this group is not $15 a week. There 
will be a number of single men and married couples 



See Chapter X. 



WAGES IOI 

without children, whose cost of living will be less 
than that of the two hundred most expensive, but they 
will get the same wages as the two hundred, because 
wages are uniform for the group just as prices tend to 
uniformity in the same market. Therefore, some of these 
single men and couples without families will be able to 
save something, have a small bank account or buy a home 
perhaps. Like the low-cost manufacturers, they get the 
same price as their dearest competitors for what they 
have to sell, and have the difference as a margin of profit. 
That is why foreigners who come to this country gen- 
erally save money, while Americans, as a rule, do not. 
They come right into groups of laborers whose wages are 
fixed by the American standard of living, which is much 
higher than their own. Therefore they get American 
wages, and, still living according to European standards, 
save up a part of their wages and frequently send money 
home. 

This group method of fixing wages also applies to 
other conditions of labor, the sanitary conditions of 
workshops, employment of children, hours of labor, etc. 
These are determined, under modern industry, not for 
the individual but for the group, and this has made it 
necessary for laborers to act, not as individuals but in 
groups. This is the chief reason why trade unions have 
come into existence; and, with all their mistakes, they 
are an inevitable part of the capitalist and wages system 
of production. 

SUGGESTED READING. 

In "Principles of Social Economics," Chapter III. of 
Part III., on "The Law of Wages." 

Additional References. In Gunton's "Wealth and 
Progress," Chapters VII., VIII. and IX. of Part II., 



102 OUTLINES OF SOCIAL ECONOMICS 

treating respectively of the "Universality of the Law of 
Wages/' "Wages Under Piece-Work/' and "Ultimate 
Analysis of the Law of Wages." 

In Adam Smith's "Wealth of Nations," Article III. 
of Chapter II., Book V., and in David Ricardo's "Political 
Economy and Taxation," Chapter XVI. Both these chap- 
ters discuss the influence of taxes upon wages, showing 
the effect of cost of living in fixing wage rates. They 
will be interesting to students desiring to make a more 
extensive study of the subject. 

EXTRACTS FROM READINGS. 

Taxes on Wages. "The wages of the inferior classes 
of workmen, I have endeavored to show in the first book, 
are everywhere necessarily regulated by two different 
circumstances: the demand for labor, and the ordinary 
or average price of provisions. The demand for labor, 
according as it happens to be either increasing, station- 
ary, or declining, or to require an increasing, stationary, 
or declining population, regulates the subsistence of the 
laborer, and determines in what degree it shall either 
be liberal, moderate, or scanty. The ordinary or average 
price of provisions determines the quantity of money 
which must be paid to the workman in order to enable 
him, one year with another, to purchase this liberal, mod- 
erate or scanty subsistence. While the demand for labor 
and the price of provisions remain the same, a direct tax 
upon the wages of labor can have no other effect than to 
raise them somewhat higher than the tax. ... A 
direct tax upon the wages of labor, though the laborer 
might perhaps pay it out of his hand, could not properly 
be said to be even advanced by him; at least if the de- 
mand for labor and the average price of provisions re- 
mained the same after the tax as before it. In all such 



WAGES IO3 

cases, not only the tax, but something more than the tax, 
would in reality be advanced by the person who imme- 
diately employed him." — From Adam Smith's "Wealth 
of Nations," Article III. of Chapter II., Book V. 

The Employer Would Pay a Tax on Wages. "If taxes 
press unequally on the farmer, he will be enabled to raise 
the price of raw produce, to place himself on a level with 
those who carry on other trades ; but a tax on wages, 
which would not affect him more than it would affect 
any other trade, could not be removed or compensated by 
a high price of raw produce; for the same reason which 
should induce him to raise the price of corn, namely, to 
remunerate himself for the tax, would induce the clothier 
to raise the price of cloth, the shoemaker, hatter and up- 
holsterer, to raise the price of shoes, hats and furniture. 
If they could all raise the price of their goods, so as to 
remunerate themselves, with a profit, for the tax ; as they 
are all consumers of each other's commodities, it is ob- 
vious that the tax could never be paid ; for who would be 
the contributors if all were compensated? I hope, then, 
that I have succeeded in showing, that any tax which 
shall have the effect of raising wages, will be paid by a 
diminution of profits, and, therefore, that a tax on wages 
is in fact a tax on profits." — From Ricardo's "Political 
Economy and Taxation," Chapter XVI. 

■ 
QUESTIONS FOR REVIEW OR DEBATE. 

1. What is the piece-work system? 

2. How is it supposed to affect the laborer's earnings? Is this 

supposition correct? 

3. How are piece-work rates really determined? Illustrate this 

in the case of new machinery introduced in a factory. 

4. Is there any injustice in this method of fixing piece-rates? 

5. To what classes and in what ways are the gains from new 

machinery really distributed? 



104 OUTLINES OF SOCIAL ECONOMICS 

6. What have laborers found to be the custom of employers 

when some of the workers earn unusually large amounts? 
What rule have the trade unions adopted to prevent this? 

7. Is this rule of the unions justified by the facts in the case? 

8. What good effect has piece-work on the relation between 

men's and women's wages? 

9. How is this result sometimes avoided? 

10. Why are women's wages lower than men's? Mention several 

reasons. 

11. Explain why the family is the real basis of wage rates, rather 

than the individual worker. Give illustrations showing 
that this is really the case. 

12. Why are country wages lower than city wages? Give some 

reasons why both the cost of living and standard of living 
are lower in the country. 

13. Explain why wages are fixed according to groups instead of 

for each separate laborer. 

14. What portion of each group of laborers determines the rate 

for the group? Why is this? 

15. How is it that foreigners coming to this country are able 

to save money when American laborers generally cannot? 

16. What has brought trade unions into existence? Are they 

a necessary part of modern industry? 



CHAPTER XIV. 



RENT. 



63. Nominal and Kconomic Rent, Rent is the gen- 
eral name of the income from the use of land. Nominal 
rent is the total amount paid to the landlord for the use 
of his land. Economic rent is what the landlord has left 
after paying his agreed share of the expenses of keeping 
up the property, such as taxes, road assessments, clearing 
off, water rights, etc. When there are improve- 
ments, such as buildings, wells, fences, etc., situated on 
the land, they are nearly always considered to belong to 
the land, and so the rent includes payment for both land 
and buildings. In reality, that portion of the rent paid 
for use of the buildings or other improvements is not 
properly rent; it is interest on the capital invested in 
these improvements. Because of the difficulty of sep- 
arating the two, however, it is usual to call the whole 
payment for use of land and improvements by the name 
of rent. We should remember that only the payment for 
use of land is really rent, and only the landlord's final 
profit is "economic" rent. 

64. How Rent Is Determined. There is a sense in 
which land is very much like capital. It is one of the fac- 
tors in production, not only as the source of raw ma- 
terials, but as an instrument actively used in production, 
like capital ; except of course that land cannot be moved 
around like machinery. Land is used for various pur- 
poses — agriculture, manufacture, and for residences. Its 



106 OUTLINES OF SOCIAL ECONOMICS 

rent is the surplus arising from its use, and the rent of 
different portions of land is determined by their different 
degrees of usefulness for the purposes for which they are 
offered. 

For example, if the land is desired for purposes of re- 
tail trade, it has much more usefulness on a prominent 
street than in a back alley or country road. If it is 
wanted for raising garden stuff it is much more useful if 
the soil is fertile than if it is a rocky, sandy hillside. If 
it is desired as a site for a factory, it is much more useful 
if located near a railway leading both to raw materials 
and to good markets than if located away off in the 
woods. 

Suppose one piece of land will produce ten bushels of 
wheat, another twelve, another fourteen and another six- 
teen bushels, with the same outlay of labor and other 
expenses. If the wheat from all three pieces is sold in 
the same market, the price per bushel will be the same 
whichever land it comes from. The consumer does not 
care whether the wheat is raised on poor land or good 
land. He wants the wheat, and it is the same to him 
whether it was raised on a hillside in New England or 
on the fertile fields of Minnesota. 

The wheat will be sold at practically the same price, 
and that price will have to be high enough to cover the 
expense of raising it on the poorest of these competing 
pieces of land. This, in our illustration, would be the 
ten-bushel tract. If the owner of the ten-bushel tract of 
land cannot pay expenses in raising wheat at less than 
seventy cents a bushel, seventy cents a bushel will have 
to be the price, so long as his crop is required in the mar- 
ket. The tracts which yield twelve, fourteen and sixteen 
bushels will get the same price per bushel, and they will 
have two, four and six bushels an acre, respectively, as 



RENT IO7 

profit. This will be due to the different degrees of fer- 
tility of these different pieces of land. The profit will 
come to the better tracts because the price of the wheat 
is fixed by the cost of farming on the poorest land used. 

The owner of the land requires the farmer to divide 
that surplus with him, in payment for the privilege of 
using the land. What the landlord thus receives is the 
nominal rent of the land. He may be able to exact all 
the surplus, or only a small part of it, depending on cir- 
cumstances. If he asks the man on the ten-bushel tract 
to pay him a bushel an acre for the use of his land, the 
man will be unable to do so, because he would lose. The 
price of the wheat only just covers his cost of produc- 
ing it. He will give up the land rather than pay this rent, 
and if the owner then takes it and uses it himself he finds 
he can get nothing but what it costs him, because the 
price of the crop only equals the cost. Therefore, the 
owner of that land can demand no rent for it because it 
will yield no surplus above the cost. 

But the cultivators of the other tracts, who make two, 
four or six bushels an acre, according to the fertility of 
the land, will divide their surplus with the land-owner 
rather than not use the land. The farmer sees that he 
could get some ten-bushel land without paying any rent, 
but he also knows that he would not make anything by 
it. If he pays the landlord a bushel per acre for the 
twelve-bushel tract he will still have a bushel left, and be 
a bushel an acre better off than if he went on to the land 
he could get for nothing. Even if he paid a rent of two 
bushels he would be at least as well off. 

This one bushel or two bushels paid to the landlord 
does not add to the price of the wheat. That is fixed by 
the cost on the ten-bushel land. The rent is simply a 
portion of the profit due to the greater productiveness of 



108 OUTLINES OF SOCIAL ECONOMICS 

the twelve, fourteen and sixteen-bushel tracts. The re- 
maining part of the surplus produced, if it is not all paid 
in rent, goes to the farmer or user of the land and is his 
profit. If he has to pay it all in rent, then he simply gets 
his living from the land and has no profit. 

65. Rent Not a Tax on Consumers or Laborers. 
Rent, therefore, is not added to the price of products but 
is taken from the profits of the user of the land. In other 
words, it is a division of the profits between the user of 
the land and the owner. Neither does rent come out of 
the laborers' wages, because wages have to be paid before 
rent arises at all. Whatever the crop, or the profit or 
loss, even though it finally means bankruptcy, the labor 
employed in cultivating the land has to be paid. Wages 
are a part of the original and necessary first cost of culti- 
vating the land and raising the crop. If the farmer hires 
no labor but does all the work himself, the same is true. 
His own labor has to be paid for in his cost of living, 
which amounts to the same thing as paying wages. In 
either case, this labor cost must be paid first ; farmer or 
laborer must at least be supported before they can work 
on the land, whatever happens afterwards. Wages are 
always a part of the first cost of production and never a 
part of the profit. Indeed, the price of the produce of the 
land is largely determined by the wages or labor cost, 
including the farmer's services, because in farming espe- 
cially these are 'the largest items in the cost of produc- 
tion and can never be avoided 

Wages are substantially the same on the ten-bushel 
tract as they are on the twelve, fourteen or sixteen-bushel 
tracts. The farmer cannot get his labor any cheaper be- 
cause of the fact that he only raises ten bushels instead 
of twelve or more ; and it is because he is forced to pay 
the wages and support himself that the price of the wheat 



RENT IO9 

must equal the cost on the poorest tract. If he has to 
drain the land the price must cover that cost, which is 
largely wages. If he has to cultivate much the price 
must cover that, which also is largely wages. If he has 
to make improved roads to give access to the farm, that 
is another cost which is largely wages. So, in any case, 
the cost of production, not only on the best but on the 
poorest land, is largely made up of wages. 

But rent is not a part of the cost of production, be- 
cause the ten-bushel tract, by which the price of wheat is 
fixed, pays no rent at all. It pays wages and the farmer's 
living and costs of different kinds, but it pays no rent, be- 
cause it produces only enough to cover these costs. The 
other three tracts each pay rent, because the cost of pro- 
duction on them is less per bushel, while the price per 
bushel is fixed by the cost on the poorest tract. Rent is 
simply a part of the surplus which arises after wages are 
paid and after the price is determined. 

Rent, therefore, does not enter into prices and hence 
does not increase prices. It does not arise until after 
wages are paid, and therefore is not taken out of wages. 
One might as well say that the amount of water in a well 
to-day depends upon the amount that will be taken from 
the well to-morrow. 

Therefore, the claim made by advocates of the "single 
tax" on land, equal, to the whole rent, that the laborer 
receives only what the landlord leaves is entirely a mis- 
take. On the contrary, the landlord receives what the 
laborer leaves. The great interest of the laborers, there- 
fore, is not in abolishing rent, but in seeing that they 
get a large amount in the first place, in wages. They 
have the first bite of the apple. Whether they will work 
for ten cents a day or will not work for less than two dol- 
lars is a question of how much their standard of life im- 



110 OUTLINES OF SOCIAL ECONOMICS 

pels them to insist upon, but in any event the landlord 
can have nothing until the laborers are paid. Every ef- 
fort to improve the condition of the laborers by abolish- 
ing rent must be as futile as trying to run a mill by the 
water that has passed down stream. Wages must be im- 
proved by improving the conditions that affect the 
laborer's home and social life and opportunities. It is by 
improvement of the conditions of the laborer's life, his 
education, his home, his social opportunities, everything 
that makes for the betterment of his personal, social and 
moral character, that wages can be raised, but never by 
attempting to regulate or abolish rent. To recognize this 
is a great step towards wise treatment of the wages 
question. 

SUGGESTED READING. 

In "Principles of Social Economics," Chapter IV. of 
Part III., on "Rent, Its Economic Law and Cause." 

Additional References. In Marshall's "Economics of 
Industry," Chapters IX. and X. of Book VI., on the 
theory of rent and history of various systems of land 
ownership. 

In Hadley's "Economics," Sections 142 to 146 inclu- 
sive, in Chapter V., discussing systems of ownership and 
rental of land; also sections 321 to 330 inclusive, in Chap- 
ter IX., on economic rent, landlord's expenses and losses, 
land speculation, etc. 

In Ricardo's "Political Economy and Taxation," Chap- 
ters II. and X. In these chapters will be found the best 
part of Ricardo's famous theory of rent, which is still the 
accepted teaching by economists of nearly every school. 
It is this same theory, expanded to cover interest and 
profits, which leads us to the cost of production theory 
of value. 



RENT 1 1 I 

EXTRACT FROM READINGS. 

Rent Does Not Affect Prices. "The reason then, why 
raw produce rises in comparative value, is because more 
labor is employed in the production of the last portion 
obtained, and not because a rent is paid to the landlord. 
The value of corn is regulated by the quantity of labor 
bestowed on its production on that quality of land, or 
with that portion of capital, which pays no rent. Corn 
is not high because a rent is paid, but a rent is paid be- 
cause corn is high; and it has been justly observed that 
no reduction would take place in the price of corn, al- 
though landlords should forego the whole of their rent. 
Such a measure would only enable some farmers to live 
like gentlemen, but would not diminish the quantity of 
labor necessary to raise raw produce on the least produc- 
tive land in cultivation." — From Ricardo's "Principles of 
Political Economy and Taxation," Chapter II. 

QUESTIONS FOR REVIEW OR DEBATE. 

i. What is the difference between nominal and economic rent? 

2. Is rent paid for buildings and other improvements on land 

properly called rent? If not, what is it, and why does it 
go under a wrong name? 

3. In what way is land like capital, and how does it differ from 

capital? 

4. Does all land yield rent? If not, what portion is it that 

pays none? 

5. Explain by an illustration just how rent arises on different 

kinds of farm land. 

6. Does the land-owner get all the surplus from the use of his 

land, or is it usually divided with the tenant? 

7. Is rent added to the price of the products of land? Give rea- 

sons. 

8. Does rent come out of the laborer's wages? Which has to be 

paid first, labor cost or rent? 



CHAPTER XV. 

INTEREST. 

66. Interest Similar to Rent. Rent is a sum paid for 
the use of an instrument and source of production — land ; 
interest is a sum paid for another instrument — capital. 
The difference is merely in the method of payment; rent 
being a gross sum paid directly for the use of land, while 
interest is a percentage paid for the use of money with 
which machinery or other forms of capital may be 
purchased. 

This difference in the method of payment makes the 
similarity between rent and interest a little unclear, at 
first sight, but it is really very simple. If, for instance, 
when we speak of interest we should name the whole 
sum paid in a year's time for the use of money, instead 
of naming an annual rate per dollar, it would be clearly 
just like rent; and if we should, in speaking of rent, name 
an annual rate per dollar on the value of a given piece of 
land, the similarity to interest would be equally apparent. 
To illustrate : If a farm is worth $10,000 and the rent is 
$500 per year, we might just as correctly say that the rent 
is 5 per cent, on $10,000 worth of property; or, if a fac- 
tory is worth $10,000 and the interest on the money with 
which it was built is 5 per cent., we might say that the 
interest is $500 per year. The result is the same in either 
case. The difference in the way of expressing it comes 
from the custom of reckoning rent as a lump sum paid for 
use of a given piece of land as a whole, not as a percent- 

112 



INTEREST 1 1 3 

age paid on each dollar represented in the value of that 
land ; while interest is reckoned as so much paid per dol- 
lar for use of money, rather than as a lump sum for use 
of the capital represented by that money. It is simply a 
reverse custom of reckoning, based on convenience. 
Money being the universal measure of value, it is easy to 
express interest as a percentage per dollar, whatever the 
number of dollars borrowed; while land being separate 
and unequal pieces of property of countless different 
values, rent could not be expressed as a percentage with- 
out always mentioning also the value of the particular 
piece of land, hence it is a more direct way simply to 
name the gross sum paid per annum. 

67. How Interest Arises. Interest is paid for the use 
of capital because the borrower expects that by its aid 
he can produce a surplus, not only larger than he could 
produce without the capital, but larger than the interest 
demanded for it, thus having a profit left for himself. 
How much interest he will be willing to pay depends on 
how large a surplus he expects the use of the capital will 
give him. The lender, perhaps, wants 5 per cent, for his 
money. The borrower is not sure that he can make that 
much surplus with it; he believes he can only realize 
about 4 per cent, extra by borrowing this money, and 
therefore declines to borrow at 5 per cent. Why? Be- 
cause the surplus he expects to be created by the new 
capital is not equal to what the owner of the capital 
wants for its use. 

That is exactly like rent. A farmer will not pay in 
rent more than, nor quite as much as, the expected extra 
productiveness of the land offered, over and above that 
of land he can get at less or no rent. A manufacturer 
will only pay in interest something less than the increased 
surplus that the borrowed capital is expected to produce. 



114 OUTLINES OF SOCIAL ECONOMICS 

Otherwise he would lose by using it, and he only borrows 
it in the hope of gaining a profit for himself over and 
above the interest. Interest is a division of the profitable 
use of capital between the borrower and the lender. 

68. How Interest Rates Are Determined. When 
money is loaned it is of course impossible to foretell ex- 
actly whether it will earn more or less than a given 
amount; nevertheless, interest has to be agreed upon in 
advance, and therefore must be based on some general 
average expectation of surplus from use of capital. In 
practical experience, some establishments find them- 
selves unable to earn the expected surplus at all, while 
others earn very much more than the ordinary. Normal 
interest rates are the result of an unconscious effort to 
strike a rough average of the varying earnings of capital 
in different lines of industry, and under ordinary circum- 
stances. The rates frequently vary from this normal 
standard according to any unusual riskiness or unusual 
security, ease or difficulty of borrowing the money, and 
other special circumstances. If, for instance, in a given 
country or section the bulk of the capital invested in ordi- 
nary lines of business earns all the way from 3 to 8 per 
cent, (some of course earning nothing and some perhaps 
10, 15 or 20 per cent.), the normal interest will probably 
be a little over 5 per cent. If in another country or 
locality the bulk of capital in ordinary business earns 
from 4 to 10 per cent., interest will tend more nearly to- 
wards 6 or 7 per cent. This higher rate will be aided by 
the fact that where earnings of capital are unusually high, 
the element of riskiness is generally larger than else- 
where. Because of the greater chance of losing all, the 
lender demands more interest, while the borrower, count- 
ing on his extra good chance of earning a large surplus, 
is willing to pay more to get the use of the lender's capi- 



INTEREST 115 

tal. In this way, interest is higher as a rule in the United 
States than in England, and much higher in the Klondike 
than in New York and Pennsylvania. 

The same is true of the risks and expected profits of 
different kinds of industries in the same community. 
For instance, a factory for making gunpowder or dyna- 
mite runs great risk of being blown up, and so has a 
much larger percentage of probable loss than a hardware 
factory or a grocery store. The average wastes and 
losses of a business have to be covered in the price of the 
product, and hence are just the same to the manufacturer 
or farmer as cost of production. In a business where the 
losses from accidents, etc., are likely to be very large, the 
prices are proportionately higher than in safer industries, 
and therefore the profits of those who escape the losses 
are also unusually high. Relying on the hope of these 
high profits and no losses, the manufacturer agrees to 
pay a high rate of interest, which the lender naturally 
demands because of the greater danger of losing his 
principal. In proportion as the risk is great the lender 
will demand a high rate of interest, and in proportion as 
the investment is safe for a long term he will accept a low 
rate of interest. For instance, the lowest rate of in- 
terest is paid for English consols and United States 
bonds. Why? Because they are believed to be absolutely 
secure. The credit of the English and United States 
governments is regarded as entirely beyond suspicion. 
There is no care and no risk in holding the bonds of 
these two governments. Interest on the bonds of old and 
profitable railroad systems is also generally lower than 
the average, for the same kind of reason. 

69. Interest Does Not Affect Prices or Wages. 
Like rent, interest is simply one part of profits, not a part 
of cost of production. It differs from wages because of 



Il6 OUTLINES OF SOCIAL ECONOMICS 

this fact. Wages are a part of cost and always have to 
be paid, but there is capital in use which yields no profit. 
Many a business man can tell of having used capital 
without being able to earn the interest on it. That capi- 
tal barely saves itself from being swallowed up in losses. 
There is no-interest capital and no-rent land, but there is 
no such thing as no- wage labor. That is to say, there is 
land used without paying rent, there is capital used with- 
out paying interest, but there is no labor used without 
being paid wages in some form or other. 

Interest, like rent again, has practically no effect upon 
prices, because prices in any industry are determined by 
the cost of furnishing the dearest portion of the product, 
and that is the portion which is unable to pay rent or in- 
terest. It is the portion that is on the verge of loss, merely 
struggling to keep in the race. Interest, except in un- 
usual instances and to an insignificant degree, is not an 
addition to prices, but is a division of profits. If all pro- 
ducers had capital enough to conduct their business with- 
out borrowing there would be no interest paid, but prices 
would not be lower. The only difference would be that 
the producers' profits would be larger. 

Rent and interest are simply two portions of the sur- 
plus earnings of industry, paid for the use of instruments 
employed in the industry and owned by other people. 
Whoever uses other people's land and capital has to di- 
vide with them the resulting profits in interest and rent. 
The common assumption that all rent and interest are an 
addition to the prices of the commodities consumed by 
the people is one of the greatest errors in economics. The 
users of the capital and land pay the interest and rent, 
not by adding it to the price of the products, but out of 
the profits of the industry. 

In business honestly conducted, interest, like rent, is 



INTEREST 117 

not robbery but is an economic division of the profits 
created by an instrument that produces wealth cheaper 
than the dearest or most expensive competitors. In other 
words, it is a division of an extra amount extracted from 
nature, and not a tax upon the consumers. 

SUGGESTED READING. 

In "Principles of Social Economics," Chapter V. of 
Part III., on "The Law of Interest." 

Additional References. In Hadley's "Economics," 
Sections 151 to 159 inclusive, in Chapter V., discussing 
interest as a system and showing how the custom of in- 
terest-paying arises. 

In Mill's "Principles of Political Economy," Section 5 
of Chapter XXIIL, Book III. This section brings out an 
important point connected with the subject of interest, 
namely, the fact that the rates of income from invest- 
ments is what determines the value of those investments. 

In Adam Smith's "Wealth of Nations," Chapter IX. 
of Book I., on "The Profits of Stock," under which 
heading Dr. Smith also discussed interest, showing it to 
be a portion of the profits of industry ; also, Chapter IV. 
of Book II., treating "Of Stock Lent at Interest." Be- 
cause of Dr. Smith's habit of close practical observation, 
what he has to say on these topics is frequently more 
correct and significant than the theories of many later 
economists. 

EXTRACT FROM READINGS. 

Interest and Pro-fits. "But though it may be impossi- 
ble to determine with any degree of precision, what are 
or were the average profits of stock, either in the pres- 
ent, or in ancient times, some notion may be formed of 
them from the interest of money. It may be laid down as 



Il8 OUTLINES OF^SOCIAL ECONOMICS 

a maxim, that wherever a great deal can be made by the 
use of money, a great deal will commonly be given for 
the use of it ; and that wherever little can be made by it, 
less will commonly be given for it. Accordingly, there- 
fore, as the usual market rate of interest varies in any 
country, we may be assured that the ordinary profits of 
stock must vary with it, must sink as it sinks and rise as 
it rises. The progress of interest, therefore, may lead us 
to form some notion of the progress of profit." — From 
Adam Smith's "Wealth of Nations," Chapter IX. of 
Book I. 

QUESTIONS FOR REVIEW OR DEBATE. 

i. How is interest similar to rent? 

2. What is the difference in the methods by which interest and 

rent are paid? What is the reason for this difference? 

3. Why is interest paid? Under what circumstances will a 

business man decline to borrow? Illustrate. 

4. How is a "normal" interest rate determined? 

5. Under what circumstances are interest rates likely to be 

higher in some countries or localities than in others? 

6. What effect has risk of loss in establishing different interest 

rates for different kinds of industries? Give illustrations. 

7. What are some of the forms of investment on which interest 

is usually very low? Why? 

8. Is interest added to the price of products? If not, from 

what source is it drawn? 



CHAPTER XVI. 

PROFITS. 

70. What Profits Are. The word profits is used in 
a double sense. Sometimes it is meant to indicate the 
whole undivided surplus earnings of an industry, and 
sometimes only what the manufacturer or farmer has left 
after paying rent and interest out of that surplus. In the 
sense in which we are now considering it, profits means 
this final balance in the hands of the man who carries 
on the business. Sometimes they are called his "wages," 
but in reality they are entirely different from wages. 
Wages are a fixed amount paid for a definite service, 
while profits are entirely uncertain and may range from 
nothing to millions of dollars a year. They are not paid 
by an employer for services, but are the employer's own 
surplus, and come, if at all, in return for an indefinite 
amount of effort on his part, devoted to managing and 
organizing the industry or utilizing natural forces in new 
ways. 

Profits are the final undivided remainder of the sur- 
plus earnings of industry. Rent and interest, being stip- 
ulated in advance, must be paid, if possible, even if they 
take all the surplus earnings of the business. If any- 
thing remains after paying these, it is the manager's or 
owner's profits. 

71. No "Average" Rate of Profits. People fre- 
quently speak of an "average" rate of profits, but in reality 
there is no such thing as an average rate of profits. On 

119 



120 OUTLINES OF SOCIAL ECONOMICS 

the contrary, hardly any two competing concerns in the 
same industry earn the same profits, or rate of profits 
They range in every line of industry from nothing at 
one end to "bonanza" at the other. To speak of an aver- 
age rate of profits is like speaking of the average height 
of the mountains in this country. Some are only a few 
hundred feet, but the highest is about fifteen thousand. 
To reduce them to an average would give no idea of any 
of them and would probably be true of no one of them. If 
there was an average of profits, then industries would be 
all uniformly prosperous, but everybody knows they are 
not. On the contrary, in every line of business there are 
some concerns that are barely holding on, others that are 
actually dropping out every year because profits have dis- 
appeared, while at the same time in the same industries 
there are some producers who are getting enormously 
rich. 

This difference between the verge of failure and grow- 
ing success is the difference in profits. The explanation 
for this has already been given in the chapters on Value 
and Cost of Production ; namely, that under competition 
prices in any given market tend towards uniformity on 
the basis of the cost of producing the most expensive 
portion of the required supply. It is easy to see that all 
who can produce at less cost than the price thus fixed will 
have the difference in profits and the profits will be 
large or small according as the cost of production in each 
different concern is very much or only a little below the 
price received for the product. This cheaper cost de- 
pends on the better location, superior methods and abler 
management of the industry, as compared with its com- 
petitors. 

72. Profits the Incentive to Improvement. Profits, 
therefore, are the great incentive which economic law 



PROFITS 12 1 

holds out to develop new methods of production, and 
careful and skilful management of industry. It rewards 
improvement with increased profit. The only way, in the 
long run, to increase profits, is by lessening the cost of 
production, through some form of productive improve- 
ment, either by the use of better machinery or larger 
organization, or more careful economies or more pro- 
gressive direction of the business. The final profits may 
be made up from several sources ; partly from the excess 
earnings of the land used, above what is paid in rent; 
partly from the excess earnings of the capital used, above 
what is paid in interest; but chiefly from the superior 
management or exceptional effort, forethought, enter- 
prise and skill of those who conduct the business. With- 
out good management many a business of fair oppor- 
tunities not only fails to earn a profit but is unable to 
avoid loss, and goes into bankruptcy. 

73. Effect of Competition. Improved methods and 
superior management tend to increase profits, but com- 
petition is all the time working to lower profits. The 
competition usually results from some of the concerns 
introducing better machinery or methods, by which the 
output is increased. The effort then is to sell this in- 
creased output by underbidding the other competitors, 
and, since the increased product has rendered some of 
the former supply unnecessary, the dearest competitors 
are now forced to improve their methods or get out of 
business. In either case the price falls to the cost level 
of the next dearest producers, and so on. This process 
of course reduces the profits of all the other competitors, 
all along the line, and they can only be restored to the 
former point by still further introducing improvements 
to lower the cost of production. So the two movements 
are constantly following each other, increase of the 



122 OUTLINES OF SOCIAL ECONOMICS 

profits by new cost-saving devices, and reduction of 
profits by competition. The profits are a stimulus to im- 
provements and progress, but they are only retained for 
a brief period. As soon as the methods which created the 
large profits become generally known, others adopt them 
and compete for the market, and before long the methods 
that once gave bonanza profits are out of date and mean 
bankruptcy to any concern that retains them. In other 
words, all that was once received by the competitors as 
profits has passed to the public in lower prices. In this 
way, for example, the price of cotton cloth has been re- 
duced during the present century from more than fifteen 
cents a yard to two or three cents, and manufacturers are 
still creating new profits even at this price, by introduc- 
ing new and better looms. All that difference in price 
has become a permanent gain to the public, while the 
winning of new profits and loss of old has served right 
along as the incentive and spur to improvements, by 
which this cheapening of cloth has been made possible. 

In the period after the introduction of improved meth- 
ods and before competition has lowered the price, the 
capitalist gets the benefit of the margin. Perhaps he gets 
rich, but that will depend on the extent of his improve- 
ment. If it is only a small one the profits will be but 
slightly increased and will disappear before he gets very 
rich. If his improvement is a great one, his profits will 
be large and he will become rich quickly. But, in any 
event, he cannot long retain the same rate of profits, ex- 
cept by still further improving or enlarging his produc- 
tive methods. 

Thus the whole process consists in giving the first in- 
crease of wealth to those who directly bring it into ex- 
istence, and then setting forces in operation which grad- 
ually and sometimes very rapidly distribute it to the en- 



PROFITS 123 

tire consuming public. This gives the necessary reward 
for the special effort, and finally gives the results of the 
improvements to society at large. Thus it really conies 
about that the increase and wide distribution of wealth, 
which the advocates of socialism believe requires a revo- 
lution to secure, is actually going on by the silent oper- 
ation of our existing economic forces. 

74. Profits Not a Tax on Consumers or Wage 
Earners. Many people believe that the profits of an in- 
dustry mean just so much taken out of the consumers 
who buy the products. But nothing can be taken out of 
the consumer which cannot be added to the price. Since 
prices are determined by the cost of production in that 
portion of the concerns which have no profits, or prac- 
tically none, then, of course, profits are not added to the 
price, and if they are not added to the price they cannot 
be a tax on the consumer. 

Suppose profits were abolished by law. That could not 
materially affect prices, because they are determined by 
the cost of that portion of the product which receives no 
profit. To take away the profits would make the pro- 
ducers who create them poorer, but it would not make 
the consumers richer. 

It may be asked, who pays the profits if the consumers 
do not? Strictly speaking, nobody pays the profits; they 
come out of nature. They are not a tax on anybody. They 
are the saving from what otherwise would be simply 
higher cost to everybody. They come as the result of 
making nature do more for the same expense. Nature 
works for nothing. It costs something to utilize natural 
forces, but the forces themselves are free. To the extent 
that they can be made to work for less than it costs to 
furnish human force, nature supplies a surplus, and it is 
from this surplus, produced by the use of successive 



124 OUTLINES OF SOCIAL ECONOMICS 

new instruments for harnessing natural forces, that 
profits are drawn. They are not a tax added to prices, but 
are a reward for devising means to make nature do an 
extra task without charge. 

Nor are profits a tax upon the wage-earner. Wages, 
as before explained, are a permanent item in all cost of 
production. Therefore wages are not paid from profits 
but enter into cost of production, and even the producers 
with the poorest methods have to pay wages. No pro- 
ducer can have profits until after wages have been paid. 
He can even escape paying for his raw material easier 
than he can avoid wage claims, since in cases of bank- 
ruptcy the laborer in nearly all modern countries has the 
first lien on the assets. Wages tend to be uniform in all 
industries of the same kind in the same market, and they 
are all a permanent part of the cost paid by all the com- 
petitors. Whatever affects all competitors alike cannot 
affect the profits, because profits arise purely from the 
differences and not the similarities in costs. 

Therefore, it would be as futile to try to increase wages 
by abolishing profits as it would be to reduce prices by 
abolishing profits. The only way prices can be perma- 
nently lowered is by lessening the costs of production by 
use of more scientific methods. The only way wages 
can be increased is by raising the standard of living of the 
workers, thus increasing their necessary cost. Social wel- 
fare demands the gradual economic lowering of prices 
and economic raising of wages. Both are forms of prices, 
and are governed by cost. That which should be low- 
ered can be lowered only by reducing the costs, by 
greater application of science to nature; and that whids 
should be raised can be raised only by an increase of itic 
cost, through improvement of the standards, ideas, habits 
and character of the laborers. Progress will not come 



PROFITS 12 5 

by abolishing profits, but by aiding the forces that make 
wealth cheap and man dear. 

SUGGESTED READING. 

In "Principles of Social Economics/' Chapter VI. of 
Part III., on "The Law of Interest." 

Additional References. In Marshall's "Economics of 
Industry," Chapters VII. and VIII., of Book VI. These 
chapters relate to profits, or "earnings of management," 
and bring- out many interesting points ; one particularly, 
showing that the cost of living or support of the owner 
or manager of the business is really a part of the cost of 
conducting the business, and not to be considered as 
profits. 

In Mill's "Principles of Political Economy," Chapter 
V. of Book IV., which contains some practical comments 
on "Consequences of the Tendency of Profits to a 
Minimum." 

In Nicholas P. Oilman's "A Dividend to Labor," 
Chapter I., discussing some of the ethical and social as 
well as industrial aspects of the employer's service to 
society and obligation to his employees. 

EXTRACTS FROM READINGS. 

How Profits Are Made and Lost. "For instance, eco- 
nomies have lately been introduced into some branches 
of iron manufacture by diminishing the number of times 
which the metal is heated in passing from pig iron to its 
final form; and some of these new inventions have been 
of such a nature that they could neither be patented nor 
kept secret. Let us suppose then that a manufacturer with 
a capital of £50,000 is getting in normal times a net profit 
of £4,000 a year, £1,500 of which we may regard as his 
Earnings of Management, leaving £2,500 for the other 



126 OUTLINES OF SOCIAL ECONOMICS 

two elements of profits. We assume that he has been 
working so far in the same way as his neighbors, and 
showing an amount of ability which, though great, is no 
more than the normal or average ability of the people 
who fill such exceptionally difficult posts ; that is, we as- 
sume that £1,500 a year is the normal earnings for the 
kind of work he has been doing. But as time goes on, he 
thinks out a way of dispensing with one of the heatings 
that have hitherto been customary; and in consequence, 
without increasing his expenses, he is able to increase his 
annual output by things which can be sold for £2,000 net. 
So long, therefore, as he can sell his wares at the old 
price, his Earnings of Management will be £2,000 a year 
above the average; and he will earn the full reward of 
his services to society. His neighbors, however, will 
copy his plan, and probably make more, than average 
profits for a time. But soon competition will increase the 
supply and lower the price of their wares, until their 
profits fall to about their old level ; for no one could get 
extra high wages for making eggs stand on their ends 
after Columbus' plan had become public property. 

"Many business men whose inventions have in the long 
run been of almost priceless value to the world, have died 
in poverty; and while many men have amassed great 
wealth by good fortune, rather than by exceptional ability 
in the performance of public services of high importance, 
it is probable that those business men who have pio- 
neered new paths have often conferred on society bene- 
fits out of all proportion to their own gains, even though 
they had died millionaires." — From Marshall's "Eco- 
nomics of Industry," Chapter VII. of Book VI. 

Profits Restore Expended Capital. "In the first place, 
then, this view of things greatly weakens, in a wealthy 
and industrious country, the force of the economical ar- 



PROFITS 127 

gument against the expenditure of public money for 
really valuable, even though industrially unproductive, 
purposes. If for any great object of justice or philan- 
thropic policy, such as the industrial regeneration of Ire- 
land, or a comprehensive measure of colonization or of 
public education, it were proposed to raise a large sum by 
way of loan, politicians need not demur to the abstraction 
of so much capital, as tending to dry up the permanent 
sources of the country's wealth, and diminish the fund 
which supplies the subsistence of the laboring population. 
The utmost expense which could be requisite for any of 
these purposes, would not in all probability deprive one 
laborer of employment, or diminish the next year's pro- 
duction by one ell of cloth or one bushel of grain." — 
From Mill's "Principles of Political Economy," Chapter 
V. of Book IV. 

QUESTIONS FOR REVIEW OR DEBATE. 

1. Why is it confusing and inadvisable to speak of profits as 

the employer's wages? 

2. How do profits differ from rent and interest? What have 

they in common with rent and interest? 

3. Is there any "average rate of profits"? Give reasons. 

4. What great incentive do profits offer? 

5. What is the effect of competition on profits? Describe the 

process, and show how profits are constantly distributed 
to the public. 

6. How long can the producer continue to receive the profits 

from an improvement in production? 

7. Do profits come out of the consumer? Give reasons. 

8. What effect have profits on workingmen's wages? 

9. From what source are profits really drawn? 

10. Would abolition of profits benefit the wage earner? What 
are the two great opposite economic movements by which 
the community is really benefited? 



CHAPTER XVII. 



SOCIALISM. 



75. What Socialism Is. Socialism is a theory of 
social reform ; a proposition for improving the conditions 
of the masses by abolishing private industry and making 
the state, or government, the owner and manager of all 
forms of production. It is the most comprehensive of all 
reform theories. Indeed, there is hardly a movement for 
social reform in this country that is not more or less fla- 
vored with socialism. The populist, single-tax, and mu- 
nicipal ownership movements, and many large labor or- 
ganizations, are to a greater or less extent socialistic 
in character, although often their respective advocates 
do not seem to realize it. 

Socialism is a distinct theory, based on the belief that 
all rent, interest and profits are robbery ; that the labor- 
ers produce all wealth, which, therefore, should all go 
to the laborers. Socialists believe that the laborers are 
in effect cheated out of any part of the total production 
which does not go to labor. 

It will be seen at once that those who advocate abol- 
ishing rent are at least one-third socialist. Those who 
believe in abolishing interest and those who would do 
away with profits are also socialists, to that extent, 
though perhaps unconsciously. But the avowed socialist 
declares that all three, — rent, interest and profits, — are 
robbery, and demands a system of industry which would 
abolish them all. If it be true that labor produces all 

128 



SOCIALISM I29 

wealth, then the socialists would seem to be right, be- 
cause surely those who produce wealth are entitled to 
possess it. If this theory be true, capitalists are just 
so many parasites on society, and the middlemen who 
buy and sell are simply robbers who help themselves at 
the laborers' expense. 

76. Does Labor Produce All Wealth ? But is it 
true that labor produces all wealth? Our study of the 
service rendered by each of the factors in production has 
already shown, indirectly, that this notion is wholly erro- 
neous. The capacity of the human race to produce 
wealth by individual labor is not much greater to-day 
than it was a thousand years ago. Personal dexterity 
in many lines is not so great. In China and Japan the 
dexterity of laborers in some occupations is even greater 
than in England and the United States. The fact is, the 
power of unaided human labor to produce wealth has 
not materially increased. Nevertheless, wealth has enor- 
mously increased ; but this has been due. to the fact that 
nature, in a hundred ways, has been made to work. 
When nature is made to work, whether it drives an en- 
gine, pumps water, or turns a windmill, it is doing what 
human muscle, would have to do, if the result were to be 
accomplished at all. 

For instance, suppose two men are rowing a boat, tug- 
ging away with their oars. One of them hoists a sail 
and lets the wind force them along much faster, and the 
oars can be thrown aside. It is not human effort that is 
now propelling the boat, but it is the wind, by means 
of the sail. 

The same is true wherever steam, electricity, gravita- 
tion, wind, water or any natural forces are used. In this 
way, the various forms of machinery used in England 
and the. United States probably produce more wealth 



130 OUTLINES OF SOCIAL ECONOMICS 

than could be produced by the unaided hand labor of the 
entire human race. Every additional dollar's worth of 
wealth brought into existence in this way is produced not 
by human labor but by nature in addition to human 
labor. Nature's forces are utilized by means of capital ; 
that is, by wealth that has been previously produced for 
just this purpose. 

It is sometimes said that this capital, by which nature 
is utilized, is "stored-up labor." It is nothing of the kind. 
There is no such thing as stored-up labor. Labor is not 
stored up; it is expended, and can never be used again. 
What is stored up is the product, whether product of 
labor only or of labor and natural forces. If a few days' 
labor is expended in making a machine, that machine is 
not stored-up labor ; it is the product or result of labor. 
It is something new that labor has brought into exist- 
ence, but the labor put on it is expended and gone forever. 
If the laborers who produced that machine had been 
idle during those few days, their labor for that time 
would have been lost and gone just as completely. 
Labor cannot be saved in the sense of being stored up, 
either by using it or not using it. If the effort is not 
expended, then the labor is lost because it was not used. 
If it is expended, it is gone forever, but what remains 
is the product. The difference to the world between 
not using and using any given labor is that by using it 
we have a product, by not using it we have not. 

The wealth thus produced in the shape of a machine 
can be used to make nature produce many times as 
much additional wealth as the labor devoted to making 
the machine could have produced. All the wealth that 
is produced by the machine, more than the labor used 
in making and afterwards operating it could have pro- 
duced alone, is net gain, and that net gain is due to the 



SOCIALISM 131 

natural forces made available by the use of the machine. 

It is obvious that if by hand labor, however skilful, 
only a given amount can be produced, say ten units, and, 
by the aid of steam or electricity, made available by ma- 
chinery requiring only this same amount of labor to con- 
struct, operate and maintain it, thirty units can be pro- 
duced, the extra twenty are the product of the steam or 
electricity. If there is any doubt upon that point, all that 
is necessary is for the laborer to try to get along with 
out the machinery, and he will find that only ten units can 
be produced. This additional twenty units of product 
is not entirely without cost. Nature does not quite 
do it for nothing, because the machinery which is neces- 
sary to utilize nature costs something to maintain and 
operate, though perhaps only a fraction of what the la- 
bor to do the whole work would cost. All the product 
over and above what the labor required to make, oper- 
ate and maintain the machinery could have produced 
alone and directly, is clear gain contributed by nature. 

Labor, if separated from capital, could not do much 
more to-day than it did a century ago, man for nan. 
Personal labor has not materially increased in produc- 
tive efficiency, and laborers do not work harder or 
longer; on the contrary, the toil is less exhausting and 
the hours of work shorter. Therefore, our great in- 
crease of wealth cannot be exclusively the product of 
labor. If labor does not produce all wealth, it is not 
necessarily true that all wealth rightfully belongs to 
labor. 

77. The Economic Division of Wealth. What, 
then, does become of all this increased wealth? As ex- 
plained in the chapters on rent, interest and profits, at 
first it goes to the capitalists. Why? Because capital, 
by applying machinery to nature, brings the increased 



132 OUTLINES OF SOCIAL ECONOMICS 

wealth into existence. Laborers do not introduce the 
machinery ; on the contrary, they usually oppose the at- 
tempts of capitalists to make natural forces produce 
wealth. They oppose it in the belief that steam or 
electricity will throw them out of work. The capitalist 
who first introduces a successful improvement is the one 
who reaps the first reward. But very soon others discover 
the way he did it, imitate his process or machine, and be- 
gin to compete for the increased wealth. This forces down 
the price of the product and finally transfers, through 
lower prices, a large part of this increased wealth to the 
public. At the same time, the laborers, through their 
organizations, begin to demand a share of the new wealth 
in the form of higher wages. So that, while the capital- 
ist, by applying productive wealth to nature, brought 
into existence a new stream of wealth, which for a time 
comes to him as profits, it is finally transferred in the 
form of cheaper commodities and higher wages to the 
community, including the laborers. 

Labor does not produce all wealth, but in this way it 
does share in the wealth that nature brings into exis- 
tence. This is not merely theory, but is proved by ex- 
perience everywhere. If the wage-earning classes in 
modern machine-using countries were only receiving as 
much as they could earn with their bare hands, they 
would be as poverty-stricken as the hand-labor masses 
of India, China and Russia. They could not, alone, pro- 
duce any more, man for man, than the Chinese or Rus- 
sians. The superiority in the earnings, comforts and 
standard of life of workingmen in countries having the 
capitalist system proves that the laborers do share con- 
stantly in the increased wealth which the application of 
capital to nature brings into existence. 

78. Socialism in History. Historically, socialism is 



SOCIALISM 133 

very old. The earliest type of industrial society was 
largely socialistic. It should be remembered that the 
essential feature of socialism is public ownership of the 
instruments of production, but this has not always taken 
the same form. The early village community, of which 
Sir Henry Maine and others have given such extensive 
accounts, was socialism of the most arbitrary kind. The 
government furnished the employments, fixed the in- 
comes, established the religion, arranged or regulated the 
marriages — in fact, left little or nothing for individual 
choice and responsibility. This was the character of early 
communities. In the middle ages, throughout Christen- 
dom, the community was mostly represented by the 
church, and practically everything was determined by 
the church authorities. 

The progress of civilization has been steadily away 
from that type of government. Wherever progress has 
showed itself it has taken the form of specialization of 
industry and growth of individual interests. This always 
brought with it a growing variety of ideas and activities, 
and assertion of personal rights. 

Among the earliest rights demanded were rights of in- 
dustry, including the right to own and sell the products 
of one's labor, or to sell one's labor direct, the right to 
select an occupation, the right to produce whatever one 
pleased, and so on. This brought with it gradually 
a greater and greater range of personal activities, and 
a smaller and smaller sphere, relatively, of "paternal" 
management and regulation by the state or community. 

Later came further separations and divisions of au- 
thority and action. The right of exercising political gov- 
ernment was taken from the church and absorbed entirely 
by the temporal authorities. The temporal authority was 
still supposed to be selected by "divine right," but even 



134 OUTLINES OF SOCIAL ECONOMICS 

this has given way, in the more advanced nations, to the 
idea of the people's right to govern. This has brought 
with it, naturally, the right of choosing one's own re- 
ligion, the right of holding and advocating political 
opinions, the right to decide about education of one's 
children ; and so, little by little, the sphere of individual 
activity, responsibility, rights and authority has widened, 
thus diminishing the element of socialism and increasing 
the element of individualism in society. 

This gradual supplanting of socialism or "paternalism" 
by individualism is the mercury that indicates the state 
of advancement of human freedom. To the extent 
that the government does for the citizen what he can do 
as well or better individually, it takes away his freedom, 
responsibility and opportunity, making him dependent in- 
stead of self-reliant, and depriving the world of the ben- 
efits of individual enterprise, ingenuity and energy. 

SUGGESTED READING. 

In "Principles of Social Economics," Sections I. and 
II. of Chapter II., Part IV. These sections discuss quite 
thoroughly the questions of what the state, or political or- 
ganization of the community, really is, and its relation to 
individual citizens. A right understanding of this prob- 
lem is very important in judging the claims of socialism. 
In the same connection it would be well to re-read Sec- 
tions II. and III. of Chapter VI., Part III., pointing out 
the error in Karl Marx's theory of "surplus value," 
which is relied on by most socialists as proving that labor 
is constantly being plundered by capital. 

Additional References. In John Rae's "Contemporary 
Socialism," from page 155, in Chapter IV., to end of the 
chapter. This chapter is on "Karl Marx," and the por- 



SOCIALISM 135 

tion suggested is a statement and criticism of Marx's 
economic theory as laid down in his great work on "Cap- 
ital." Chapter X., on "Socialism and the Social Ques- 
tion/' is also recommended ; it discusses a number of the 
more common charges made by socialists against our 
present industrial system. 

In William Graham's "Socialism, New and Old/' Chap- 
ter I., on "The Forms of Socialism;" and Sections I. and 
II. of Chapter II., describing early types of socialism, 
among the Jews, under the catholic church, under feudal- 
ism, etc. For those desiring to make a more thorough 
study of the development of socialism as a theory, the re- 
maining six sections of Chapter II., and the whole of 
Chapters III. and IV. are recommended. These chapters 
describe the different phases of socialist doctrine from the 
time of the Jews and early Christian era (above recom- 
mended for reading) down through the nineteenth cen- 
tury to "The New Socialism and its Argument." 

In W. H. Mallock's "Labour and the Popular Wel- 
fare," Chapter VI. of Book II., and the four chapters of 
Book III. These chapters are devoted to showing the 
very large part taken by "Ability" in the production of 
wealth ; but it should be noted that under this head Mr. 
Mallock includes the capital directed by "Ability," the 
object being to show, somewhat roughly, what part of 
our wealth production is due to labor and what part to 
capital and management. 

The pamphlet, "Economic Basis of Socialism," by 
George Gunton, is also recommended. 

EXTRACTS FROM READINGS. 

Socialism's Aim and Method. "Socialism is that system 
economic and political, in which the production of wealth 
is carried on solely by the state, as the collective owner of 



136 OUTLINES OF SOCIAL ECONOMICS 

the land and instruments of production, instead of by 
private capitalist employers or companies ; while the dis- 
tribution in like manner is made by the state on some 
assumed principles of justice, which give to each in pro- 
portion to his work, instead of being as now determined 
largely and immediately by contracts, and ultimately by 
laws of property and inheritance. This, the only true 
socialism according to its adherents, is now generally 
called collectivism, to denote the collective ownership or 
ownership by the state, as the representative of all, of the 
land and instruments of production. It distinguishes it- 
self from communism, inasmuch as it admits of private 
property in articles of consumption, and to a certain lim- 
ited extent, of inequality of shares, accumulations, and 
inheritance. Only it suppresses private enterprise, it will 
not allow individuals to use their accumulations to' set 
others to labour for them, with a view to make profit from 
their labour, nor to lend for the sake of interest, nor to 
let for the sake of rent or hire, nor in any way to make 
private gains from their superfluous goods; because by 
these means great inequality might come back, and it is a 
principal aim of the new socialism not only to extinguish 
great inequality, but to prevent forever its return." — 
From William Graham's "Socialism, New and Old," 
Chapter I. 

Labor's Share of Wealth Increases the Faster. "Greg- 
ory King made an estimate of the distribution of wealth 
among the various classes of society in England in 1688, 
founded partly on the poll-books, hearth-books, and other 
official statistical records, and partly on personal observa- 
tion and inquiry in the several towns and counties of 
England; and Dr. C. Davenant, who says he had care- 
fully examined King's statistics himself, checking them 
by calculations of his own and by the schemes of other 



SOCIALISM 137 

persons, pronounces them to be Very accurate and more 
perhaps to be relied on than anything that has been ever 
done of a like kind.' Now, a comparison of King's 
figures with the estimate of the distribution of the na- 
tional income made by Mr. Dudley Baxter from the re- 
turns of 1867, will afford some sort of idea — though of 
course only approximately, and perhaps not very 
closely so — of the changes that have actually occurred. 
. . . . The average income of a working-class fam- 
ily in King's time was £12 12s. (including his artisan 
and handicraft families along with the other laborers) ; 
the average income of a working-class family now is £81. 
The average income of English families generally in 
King's time was £32 ; the average income of English 
families generally now is £162. The average income of 
the country has thus increased five-fold, while the aver- 
age income of the working class has increased six and a 
half times. The ratio of the working-class income to the 
general income stood in King's time as 1 123/2 and now as 
1 :2. In 1688, 74 per cent, of the whole population be- 
longed to the working class, and they earned collectively 
26 per cent, of the entire income of the country ; in 1867 
— according to the basis we have adopted, though the 
proportion is doubtless really less — 80 per cent, of the 
whole population belonged to the working class, and they 
earned collectively 40 per cent, of the entire income of 
the country. Their share of the population has in- 
creased 6 per cent. ; their share of the income 14 per 
cent." — From Rae's "Contemporary Socialism," Chap- 
ter X. 

QUESTIONS FOR REVIEW OR DEBATE. 

1. What is socialism? On what charge against industrial so- 
ciety is it based? 



138 OUTLINES OF SOCIAL ECONOMICS 

2. What is the aim of socialism, and how does it propose to 

accomplish that aim? 

3. How does socialism compare with other prominent reform 

movements? What have each of these movements in 
common with socialism? 

4. What theory about the production of wealth is the basis of 

socialist doctrine? 

5. Is this theory correct? What is the other great active factor, 

besides labor, in wealth production, and how is it utilized? 

6. What do the socialists claim as to "stored-up" labor? Can 

there be any such thing as ''stored-up" labor? Give 
reasons. 

7. What portion of the wealth produced by the aid of natural 

forces is net gain to the world? Is this the result of labor 
or of application of capital? 

8. How does the producing capacity of hand-labor, unaided by 

machinery, compare with that of, say, a century ago, man 
for man? How does it compare as between the oriental 
and western nations ? 

9. To whom does the increase of wealth due to application of 

capital first go? Why does it not go directly to the la- 
borers? 

10. When and in what ways do the laborers and the public share 

in this increased wealth? 

11. What comparison proves that labor does share in the wealth 

increase coming from application of capital to nature? 

12. Under what state of society has socialism actually existed? 

What were its characteristics under those conditions? 

13. What effect has the progress of society had on these social- 

istic forms of government? 

14. Show the steps by which the movement towards greater 

individual liberty has developed. 



CHAPTER XVIII. 

socialism — Continued. 

70. What Socialism Promises. Just as socialism is 
the most thoroughgoing in its plan of reorganizing so- 
ciety, so it is the most sweeping in its promises of the 
universal comfort and justice it would usher in. Edward 
Bellamy, in his "Looking Backward/' a book which at- 
tained wide popularity some years ago, described in de- 
tail an imaginary perfected state of society, wherein 
every man, woman and child received a generous income, 
the same to each one, regardless of the service per- 
formed; inequality, injustice, crime, poverty, ignorance 
and intemperance had disappeared, and happiness was all 
but universal. This had come about entirely by making 
the government the sole owner and manager of all pro- 
ductive industry, .with an elaborate and complicated 
method of determining the lines of industry or labor 
which each man should follow. This is only one of 
many books that have appeared from time to time, pur- 
porting to describe an ideal state of society, some writ- 
ten purely as fanciful works of imagination, others as 
very earnest and sincere attempts to point out a swift 
and easy solution for most of the great problems of hu- 
man life. Perhaps the most famous of them all is Sir 
Thomas More's "Utopia," published in 15 16, describing 
the conditions and customs of life in a supposable ideal 
community where all things were held and enjoyed in 
common. 

139 



I/J.O OUTLINES OF SOCIAL ECONOMICS 

Such pictures are always alluring, and appeal strongly 
not only to the sentimental and visionary, but to thou- 
sands of earnest, sympathetic people who are tormented 
by the hardships and suffering they see about them and 
readily turn to the most summary and radical proposi- 
tions that are offered as a cure. No one can be blind to 
the defects, injustices, poverty and misery that are still 
such prominent features of human life; and ought not to 
if he could. It is not here that those who believe in 
preserving our present social system differ with the so- 
cialists. The faults, the shortcomings, excepting heated 
exaggerations, are admitted, but the great point of dif- 
ference is how to get rid of them ; what remedy will root 
out these evils without sacrificing in the process more 
than is gained ? It must be remembered that poverty, ig- 
norance, crime, oppression and the thousand forms of 
human suffering have existed since the beginning of the 
human race, and under almost every conceivable form 
of government, laws and religion. On the other hand, 
it is becoming clear, as our knowledge of history in- 
creases, that all along the lot of man has, by slow and 
painful steps, with many and wearisome delays, been 
growing better. By comparing the condition of the 
masses in the most advanced countries to-day with that 
in the most backward, or with that in the same advanced 
countries several hundred years ago, this fact of pro- 
gress, of improvement, is made very clear. There are 
still great numbers who are deep in poverty, but the 
proportion of these to the whole is less than ever before. 
Comfort is more general than ever before ; that is, it is 
enjoyed by a much larger proportion — the great majority 
in several countries — than ever before ; and the same' is 
true of personal freedom in religion and government, se- 
curity in personal and domestic rights, reasonable and 



SOCIALISM 141 

healthful conditions of labor, decent conditions of living, 
opportunities for education, recreation and culture. None 
of these things are yet anywhere near so abundant, foi 
the mass of the people, as they should be ; indeed, from 
the standpoint of the more advanced the life and oppor- 
tunities of the millions seem pitifully meager. But, since 
it is true that the lot of the average man is improving, 
and never more rapidly, certainly and universally than 
during the century just closing, we are compelled to ask 
ourselves, soberly and without prejudice, whether we are 
not likely to approach the ideal, or at least vastly im- 
proved, social conditions towards which we are strug- 
gling, sooner, more safely, and with less sacrifice of the 
great rights of personal liberty for which men have 
labored and fought all down the ages, by preserving our 
present industrial and social system, developing its ad- 
vantages and weeding out its defects, than by running the 
fearful risk of a radical, strange, experiment. Especially, 
we ought to ask this when the experiment is one that 
takes little account of the imperfections of human nature, 
but would overturn our existing institutions, abolish pri- 
vate industry, abolish the personal right to choose occupa- 
tions, take away the stimulus to industrial progress which 
is now orTered by the hope of making profits, and in gen- 
eral place every man's work and opportunities absolutely 
in the hands of the government, which would of necessity 
have to be a despotism, — a despotism of the mass rather 
than of a prince, to be sure, but a despotism nevertheless. 
In other words, ought we to put our faith in the method 
of natural evolution or of arbitrary revolution ? 

80. Difference Between Socialism, Communism and 
Anarchism. To determine this question we must see 
just what socialism proposes to do, and judge how it 
would probably work in practice. There is a great dif- 



1-42 OUTLINES OF SOCIAL ECONOMICS 

ference between the plan proposed by socialists and that 
offered by the communists and anarchists. "Commun- 
ism" merely proposes that all property shall be held in 
common, consumable products as well as productive cap- 
ital, and used freely as each one desires. "Anarchism" 
would abolish all government and allow every man to 
work and live as he chose, produce what he pleased and 
do what he liked with it, free from any hindrance or in- 
terference by authority of any kind. The only limit it 
would place to the domination of one man by another is 
the personal resistance of that other man, and anarchists 
believe this would lead to voluntary recognition by each 
of the rights of all, without government of any kind. 
The theory only needs stating to show its utterly vision- 
ary and impracticable character. 

81. Proposed Methods of Socialism. Socialism is 
the very opposite of anarchism. It proposes that the 
community, through the government, shall take pos- 
session of all the means or instruments of production ; — 
capital, including all factories, railroads, steamboats, etc., 
and land, including, of course, mines, forests, oil wells 
and all natural resources whatsoever. Private ownership 
of the means of production in any form is to be pro- 
hibited. All production must be under public manage- 
ment, with instruments owned by the public, and then, of 
course, the public would get all the benefit. The capitalists 
and middlemen would become unnecessary; they would 
be ordered into other branches of the productive system 
as the government might provide opportunity. Socialism 
promises by this method to abolish all injustice, to make 
poverty on the one hand and large wealth on the other 
impossible. 

Although nearly all socialists are agreed on the general 
features of this program, there is the widest difference 



SOCIALISM 143 

among them as to details. Some believe that the man- 
agers or superintendents of the various industries should 
be chosen by popular vote; others think they should be 
selected by test examinations. Some insist that each 
man's share of the wealth produced should be the same ; 
ethers advocate a so-called "scientific" division, according 
to the hardship of the task, or else according to 
the value of the service to society, — which would come 
back dangerously near to our present system of wages 
and profits. Some demand that socialism shall be estab- 
lished by a sudden, forcible, revolution ; others want it to 
come by a majority vote in the regular political method ; 
still others expect it to develop naturally, through co- 
operative experiments, municipal ownership of street 
railroads, gas plants and the. like, government ownership 
of railroads, and so on. 

82. Economic Effects of Socialism. The complete 
scheme of modern socialists has never, of course, been 
applied anywhere, but there have been many approaches 
to it and many experiments on a small scale. As we saw 
in our brief review of the history of socialism in prac- 
tice, wherever the paternal or socialistic element in gov- 
ernment has been most prominent, progress has been 
least. In such countries as Russia we find the greatest 
amount of collective authority and paternalism. In not 
a few instances in these countries the primitive village 
community with its many common-ownership features 
still exists, and the progress of industrial diversification 
has been very slight. Under these conditions individual 
rights have scarcely been born, and authority, both po- 
litical and religious, is despotic. The individual counts 
for but little. He is not recognized or consulted about 
the government or even about himself, and if he ven- 
tures to have an opinion it may cost him his life. 



144 OUTLINES OF SOCIAL ECONOMICS 

As we ascend in the scale of progress we find in the 
different nations an increasing diversity of industry and 
individual enterprise, extension of personal rights, re- 
ligious and political freedom, and a narrowing of the 
range of the government's activity. Thus Germany and 
France are less paternal and communistic than Russia or 
Persia. England and America are still less paternal than 
France or Germany, and correspondingly higher in free- 
dom and civilization. 

Socialism asks that the individual freedom and initia- 
tive which have been won by centuries of struggle and 
hardship shall be replaced by a social despotism of ma- 
jority rule. The right to engage in industry, to have and 
keep or dispose of the fruits of one's labor, to exercise 
individual judgment and responsibility, is to be super- 
seded by the collective authority of the community 
through the government. Of course modern socialism 
would not try to duplicate the early village community 
or the Persian type of authority. It would not have a 
divinely-appointed czar, but it would have mediocre pop- 
ularly-elected bureaus and officials with power to regu- 
late absolutely all the most important interests that affect 
the individual. Nothing, probably, could be more clumsy, 
costly and inefficient as a director of industrial affairs 
than such a committee, elected by popular vote or by any 
political machinery yet devised. To take the tools of in- 
dustry out of the hands of private individuals and turn 
them over to the government would at once put industrial 
enterprises into the control of inferior and very often in- 
competent management. 

It has been found from long experience that under 
democratic government the very best are seldom chosen 
for any position, from president of the United States 
down to ward alderman. The criticisms of the press and 



SOCIALISM 145 

complaints of citizens testify that our really ablest and 
best qualified men are rarely elected to any public office, 
executive or legislative. The reason for this is simply 
because they have to be elected, instead of reaching their 
positions by natural merit-testing competition. Whoever 
has to be elected to any position will necessarily have to 
represent those who elect him, and whoever represents 
either a party or the public at large is almost invariably 
below the best. He must represent not the best but the 
majority, which is always mediocre. Control and man- 
agement of industry by majority vote is a long way be- 
hind what the individual expert could give. 

This has been demonstrated by all the experiments that 
have yet been made, and they are very numerous. Many 
experiments have been made in this country and Europe 
in socialistic industrial communities. Robert Owen's 
settlement at New Harmony, Indiana, in 1825 ; the nu- 
merous experiments based on the ideas of the French 
reformer Fourier, a little later; the Brook Farm com- 
munity near Boston, in the early forties ; and several so- 
cialistic communities of Americans in California, Mexico, 
etc., all have had to be abandoned. Not one proved an 
economic success, because they lacked individual initia- 
tive and personal enterprise, and lost the advantage of 
expert effort and management. They were organizations 
in which the mediocre majority tried to make everything 
equal and uniform, and so suppressed the growth of the 
best. 

Socialism could only achieve what it promises by caus- 
ing some immense economies or increase in the produc- 
tion of wealth, but all experience shows that removal of 
competition has just the opposite effect, leading to greater 
waste in methods and general lessening in productive 
activity. Mere equal division of what is now produced 



146 OUTLINES OF SOCIAL ECONOMICS 

would leave nothing for new enterprises and would add 
but little to the income of the wage-earning classes, while 
even this would tend to disappear with the slackening of 
productive energy. 

Numerous experiments have been made in manufac- 
turing industries on a plan of co-operation very much 
like socialism. A large number of cooperative cotton 
factories were built in the north of England in the sixties 
and seventies. The management of these mills was de- 
termined by the majority vote of the stockholders as in- 
dividuals, each counting one, regardless of the amount 
of stock he might hold. The theory of this was that one 
man was just as wise and efficient as another, and that 
the man who had one share of stock was entitled to just 
as much voice in the management of a business enter- 
prise as the man who had a hundred shares. In other 
words, they assumed that human beings are not only 
equal in their rights and opportunities but also equal in 
their industrial abilities. They believed that the acquisi- 
tion and ownership of property is no sign of industrial 
superiority. The result was that these concerns, which 
were at first among the best-appointed factories in Lan- 
cashire, little by little dropped behind in the competition 
with regular capitalistic factories, through inferior man- 
agement, internal quarrelings, and short terms of office 
for their managers and overseers, until, one after another, 
in order to avoid bankruptcy, they had to be converted 
from socialistic or cooperative factories into joint-stock 
corporations, and they are now successful enterprises. 

Thus far, any attempt on any considerable scale to con- 
duct industry on the socialistic principle has resulted in 
failure and arrest of progress. This is not surprising, 
because socialism attempts to reverse the whole course of 
natural progress by which every advantage in scientific 



SOCIALISM 147 

wealth production, personal opportunities, religious free- 
dom and democratic government, has been evolved. 
Progress is a movement towards greater variety of hu- 
man effort and complexity of methods, and any theory 
which proposes to substitute collective paternalism for 
individual initiative, uniformity for diversity, is an effort 
to retrace the steps of progress. In the nature of things 
such an attempt must either fail in itself or else put so- 
ciety back. However plausible a theory may be, how- 
ever attractive its promises, if it proposes to accomplish 
its reforms by turning society backward to any earlier 
and cruder forms of human institutions, it will prove a 
blow to freedom and progress. 

83. Effects on Individual Life Socialism, beyond 
question, would have very deep and far-reaching effects 
on the development and quality of individual character, 
aside from its economic results. This phase of the sub- 
ject is too broad for proper discussion here, it involves 
so much of psychology and sociology, but in general it 
may be said that any scheme which proposes to take all 
elements of individual initiative, risk, enterprise and re- 
sponsibility out of human society could only result in a 
weakening of purpose, deadening of ambitious energy, 
and general settling down to a monotonous routine of 
appointed tasks. It would lead to a decay of that spirit 
of personal independence, self-reliance, excellence, and 
sense of responsibility, which develop strength, sound- 
ness and breadth of character. It would tend to remove 
most of the strongest influences which discipline, train 
and develop the personal life and at the same time invest 
it with variety, interest, deep significance and promise. 



148 OUTLINES OF SOCIAL ECONOMICS 

SUGGESTED READING. 

In "Principles of Social Economics," Section III. of 
Chapter II., Part IV. This section is on "The Function 
of Government; or, The Controlling Principle in States- 
manship/' and points out the dividing line between the 
class of undertakings that should be carried on, or con- 
ditions regulated, by the government, and those that 
should be left to private enterprise and individual choice. 

Additional References. In Rae's "Contemporary So- 
cialism," Chapter XL, on the practical aspects of "State 
Socialism," pointing out how the various socialist propo- 
sitions might be expected to work in practice. 

In Gunton's "Wealth and Progress," Section III. ol 
Chapter I., Part III. This also deals with the short- 
comings of socialism in practice; it is entitled: "Inade- 
quacy of Socialistic Methods." 

In George Harris's "Inequality and Progress," Chap- 
ters I. to VIII. inclusive ; but the whole book of twenty 
chapters might be read with great profit. It is a lucid, 
philosophical treatise, showing the impossibility of bring- 
ing about actual equality in any department of human 
life. Dr. Harris points out how in fact all the progress 
of the race comes from inequality or variety, and how, 
from the opportunities thus offered and responsibilities 
imposed, the highest development is attained, of which 
the race is capable at any given time. 

In Henry Wood's "Political Economy of Natural 
Law," Chapter XIII., on "Socialism as a Political Sys- 
tem." Mr. Wood here contrasts the effects of the so- 
cialist proposition and the workings of natural law, on 
character and progress. 

In Graham's "Socialism, New and Old," Chapter VI., 
on "The Distribution of Wealth," as proposed by so- 



SOCIALISM 149 

cialism, and Chapter XIII. on "The Supposed Spon- 
taneous Tendencies to Socialism." 

The Ann Arbor address of Nicholas Murray Butler on 
"The Education of Public Opinion," referred to and 
quoted from in Chapter L, might well be read again for 
the contrast it draws between healthy individualism and 
social uniformity. 

EXTRACTS FROM READINGS. 

What "Equality" Would Mean. "Nature knows no 
such thing as equality; it is a human invention thrown 
up as an artificial barrier against selfishness and tyranny. 
The law of life is the development of the heterogeneous, 
the dissimilar, the unequal ; it tends away from the dull 
inefficiency of uniform equality toward the high effective- 
ness of well-organized differences. Destroy inequality of 
talent and capacity, and life as we know it stops. De- 
mocracy becomes unthinkable. The corner-stone of de- 
mocracy is natural inequality, its ideal the selection of the 
most fit. Liberty is far more precious than equality, and 
the two are mutually destructive. If all the hills and 
mountains of Europe were leveled off, it would result in 
producing a barren, dismal plain some nine hundred and 
odd feet higher than the present shore line. The beauty 
and productiveness of a continent would be gone. If all 
the wealth of the United States were divided equally 
among the population, it is estimated that we should each 
possess a capital of $1,100. Industry would be reduced 
to the lowest level ever known in modern times, every- 
thing which makes life agreeable would go out of it, and 
we should all be driven to a conflict and struggle for a 
bare subsistence to which the state of primitive war de- 
scribed by Hobbes would be as nothing." — From address 



150 OUTLINES OF SOCIAL ECONOMICS 

of Nicholas Murray Butler, at the University of Michi- 
gan, June 22, 1899. 

Coercion Under Socialism. "Socialistic agitators des- 
cant upon 'wage-slavery,' but that is nothing compared 
with a coercion which would sweep away all liberty. 
The employer — and, the vast majority of employers are 
not rich — is a 'slave' to the markets, as much as the wage- 
earner to his toil, and often more, for he cannot so easily 
change his position. It would indeed be slavery to have 
eating, sleeping, clothing, working, and all the social and 
personal activities conducted upon the compulsory plan, 
in which each is assigned his place by the 'majority,' 
which would really consist of a few official dictators. 
The blotting out of individual liberty would mean real 
slavery. There would be no incentive for personal effort, 
such as is now afforded by the hope of providing for in- 
firmity or old age, or for the wants of family and kin- 
dred. The fruits of a man's industry would belong to 
'The State.' The choice of occupation would be dictated 
by the office-holders of the- dominant party." — From 
Henry Wood's "Political Economy of Natural Law," 
Chapter XIII. 

Defects of State Management of Industry. "What are 
the conditions of efficient state administration? The 
state possesses several natural characteristics which give 
it a decided advantage as an industrial manager, some for 
one branch of work, some for another. It has stability, it 
has permanency, and it has — what is perhaps its principal 
industrial superiority — unrivalled power of securing unity 
of administration, since it is the only agency that can 
use force for the purpose. On the other hand, it has one 
great natural defect, its want of a personal stake in the 
produce of the business it conducts, its want of that keen 
check on waste and that pushing incentive to exertion 



SOCIALISM 151 

which private undertakings enjoy in the eye and energy 
of the master. This is the great taproot from which all 
the usual faults of government management spring — its 
routine, red-tape spirit, its sluggishness in noting changes 
in the market, in adapting itself to changes in the public 
taste, and in introducing improved methods of produc- 
tion. Government servants may very generally be men 
of a higher stamp and training than the servants of a 
private company, but they are proverbial, on the one 
hand, for a certain lofty disdain of the humble but val- 
uable virtue of parsimony, and, on the other, for an un- 
progressive, unenterprising, uninventive administration 
of business. 

"Now, the branches of industry which the state is fitted 
to carry on are of course those in which its great fault 
happens to have small scope for play, and in which its 
great merit or merits have great scope for play; those, 
for example, which gain largely in efficiency or economy 
by a centralized administration, and suffer little harm 
comparatively from a routine one. That is the reason 
governments always manage the postal service well. In 
post-office work the specific industrial superiority, of gov- 
ernment carries its maximum of advantage, and its speci- 
fic industrial defect does its minimum of injury. The 
carrying and delivery of letters from one part of the em- 
pire to another require, for efficiency, a single co-ordina- 
ted system, and, on the other hand, those operations them- 
selves are of so unvariable and routine a character that 
little harm is done by their being carried on in a routine 
spirit; they involve so little capital expenditure — the en- 
tire capital of the department in England is only £80,000 
— that the opportunity for waste and corruption is slight ; 
and being conducted much more largely under the public 
eye than the affairs of other departments of state, they 



152 OUTLINES OF SOCIAL ECONOMICS 

are consequently subject to the constant and interested 
criticism of the people whose wants they are meant to 
satisfy. The same reason explains why government 
dockyards and arms factories are always managed so un- 
satisfactorily. There is, on the one hand, no need in them 
for any higher unity of administration than is wanted 
in any ordinary single business establishment; but, on 
the other, progressiveness and adaptability are of the first 
moment, routine and obstruction to improvement being 
indeed among their worst dangers. Then the risk of 
prodigality and corruption is high, for their capital ex- 
penditure is great, and the check of public criticism very 
distant and ineffectual. So exceptional a business is the 
post, that the telegraphs, though managed by the same 
department, have never been managed with the same suc- 
cess. They were bought at first at a ransom, they have 
involved an increasing loss nearly ever since, and the 
public have to pay practically as much for their telegrams 
— perhaps more — than the public of the United States 
pay to their telegraph companies. Even in the postal de- 
partment, government administration shows the usual 
official slowness in adopting much-needed and even lucra- 
tive reforms. Of this, a good example occurred only the 
other day. It was not until a Boys' Messenger Company 
was already in the field and doing the work that the post- 
master-general was brought to recognize, as he said, 'the 
desirability of providing a more rapid means of trans- 
mitting single letters for short distances and under special 
circumstances than at present exists.' " — From Rae's 
"Contemporary Socialism," Chapter XL, Section IV. 

QUESTIONS FOR REVIEW OR DEBATE. 
i. What are some of the benefits promised by socialism? 



SOCIALISM 153 

2. Mention two of the best known descriptions of an imaginary 

ideal socialistic society. 

3. In considering remedies for poverty and other social ills, 

what great facts about human progress should be re- 
membered? 

4. In the light of these facts, what question ought we to ask 

ourselves as to the best and safest methods of further ad- 
vancement? 

5. Explain the difference between socialism, communism and 

anarchism. 

6. What system of production does socialism propose? Men- 

tion some of the differences in details advocated by dif- 
ferent groups of socialists. 

7. What are some of the methods by which socialists hope to 

see their system established? 

8. What is true of the comparative civilization of countries with 

different degrees of "paternalism" in their government? 
Give instances. 

9. What would be the effect of substituting elected officials 

for private management of industries? 
10. Why does popular election almost always result in the 

choice of mediocre men? 
n. Mention some of the experiments in socialistic community 

life that have been made; what has been the result, and 

why? 

12. Describe the great experiment in manufacturing coopera- 

tion in England, and explain the outcome. 

13. In what chief respect is socialism contrary to the natural 

law of progress? 

14. What would probably be some of the effects of socialism 

on individual character? 



CHAPTER XIX. 



THE SINGLE TAX. 



84. The SingIe=Tax Theory. To put a "single tax" 
on land, equal to its economic rent, and abolish all other 
forms of taxation, is a scheme of social reform pro- 
pounded by Mr. Henry George in his "Progress and Pov- 
erty." It is advocated as one of those comprehensive re- 
forms which will solve every phase of industrial and so- 
cial injustice and hardship. On the score of simplicity it 
leaves little to be desired. It is probably the simplest 
scheme for solving the ills of society that was ever pro- 
pounded. It is much simpler than socialism. It does not 
propose that the government shall take possession of and 
operate all the industries of the country. The single-tax 
plan proposes to abolish poverty and injustice by im- 
posing a single tax upon land, to the full extent of the 
economic rent derived from it. The basis of this doctrine 
is that God gave the earth to all the human race, and 
therefore individual ownership of any part of the earth's 
surface is a violation of God's moral law. It is "held to 
be robbery, because it is taking for individual benefit 
what the Creator gave to everybody. 

85. Its Fundamental Error. The great error in 
this proposition is that it assumes the value of land to be 
a part of its original condition. This is a mistake. In 
its original state land had no value. Value comes only 
when the land is utilized for human purposes, which al- 
ways means that effort is bestowed upon it. Nature sup- 

i54 



THE SINGLE TAX 155 

plies the substance but man supplies the value. There was 
just as much land in this country when the Pilgrims came 
as there is now, but it had no value. When the Indians 
were roaming over the country, the iron and coal and 
gold and silver in our mountains was all there, but it had 
no value. The value came only when labor and capital 
were applied to appropriate it. Of course, man did not 
create land, neither does he create wool or iron. He 
tends the sheep and nature grows the wool. He clips 
the wool, washes it and manufactures it, and it is the 
clipping, washing and manufacturing, together with the 
expense of raising the sheep, that gives the wool its value. 
86. How Land Values Are Determined. But, in 
considering the value of particular pieces of land, we find 
there is a great deal of productive land that has a high 
value, but upon which the expenditure has been small, 
compared with its value, while other land requiring pro- 
portionately larger expense to utilize it has a low value. 
This is strictly in accordance with the general law of 
value; the law of land values, indeed, is simply a deduc- 
tion from or continuation of the law of rent. Rent arises 
on any given piece of land used in production in propor- 
tion to the surplus which it will yield over and above 
that derived from the least productive land whose prod- 
ucts compete in the same market. The value of the piece 
of land itself is reflected from its earning power ; it will 
be high or low according as this rent or surplus-yielding 
capacity is large or small. In other words, the value of 
a piece of land used in agriculture or any form of indus- 
try depends upon its profitableness as compared with its 
poorest or dearest competitors. Some land is so barren 
or so far from a market that it cannot be made to pay 
the expenses of any kind of productive effort applied to 
it ; such land yields no rent and has no value, unless it be 



156 OUTLINES OF SOCIAL ECONOMICS 

a speculative value due to anticipated profitableness. 
Other land, more fertile or nearer to markets or offer- 
ing superior business advantages, will yield a surplus, 
and hence will have a value in proportion to this surplus 
derived from it ; and this surplus arises only because the 
price of its products is determined by the cost of produc- 
tion on the poorest or dearest land competing with it. It 
is for exactly the same reason that some manufacturing 
plants are much more valuable than others, because they 
can be operated at less relative cost and so will yield a 
larger profit. 

Land used for residence purposes is really in the group 
of commodities ; it is not an instrument of production. 
Productive land is what the single-tax proposition chiefly 
attacks, although the theory includes all kinds of land. 
Residence property is judged, not by the wealth that can 
be derived from it, but by its convenience, beauty of sit- 
uation and general social desirability. Its value is deter- 
mined by the same law that fixes the prices of commodi- 
ties. Plots of land of equal residential utility, conve- 
nience, etc., are like so many hats — they are all alike, and 
tend to be uniform in price. That price, whatever it is, 
is determined just as in the case of hats — by the cost of 
production of the dearest portion for which there is a 
market demand. In the case of land, cost of production 
means cost of developing, advertising, improving, making 
accessible by streets, supplying water and drainage, and a 
score of expense items. The owners of a certain portion 
of the plots of any given class, judged as residence prop- 
erty, find that these costs, including loss from unsold 
portions, etc., are greater than in the case of any of their 
competitors. They, therefore, will resist any competitive 
effort to force the price of the plots below a point that 
will at least repay their investment; sometimes they will 



THE SINGLE TAX 157 

hold land for years rather than sell at a loss. This tends 
to establish the general line of value for residence prop- 
erty of that same class, and the other landowners will 
rate their property, or offer it for sale, at approximately 
the same price. Some, of course, for the sake of quick 
returns, will sell their holdings for less, but this seldom 
affects what is recognized as the actual value of that class 
of property, so long as the dearer portions are also in 
demand. The great differences in the value of different 
kinds of residence property are due simply to the fact 
that they belong in different groups, differing in residen- 
tial utility, just as caps, derby s and silk hats differ in so- 
cial utility. In each separate group, however, the price 
for all is determined by the cost of supplying the dearest 
portion. 

87- Cost Goes With Value. Therefore, it is not 
true that the value of land, either for production or resi- 
dence, is a free contribution of nature. It would have no 
value at all if human effort were not exerted to utilize it, 
make it accessible and available, and, in the case of pro- 
ductive land, to conduct industry upon it. Almost inva- 
riably, the most valuable land is that on which the largest 
actual amounts of effort and capital have been expended 
to give it its superior productivity, and which costs the 
most in gross amount, though of course less relatively, 
to maintain it; for example, the lots on Broadway in 
New York city. All that has ever been expended on har- 
bor and transportation facilities, on street improvements, 
on water and light supply, on fire protection, on all the 
phases of city government for which land taxes have been 
exacted, not to mention the expense of the buildings 
erected on these lots, have been items of cost, contribu- 
ting directly and indirectly to the earning power of the 
land and hence contributing to its value. Therefore, so 



158 OUTLINES OF SOCIAL ECONOMICS 

far from land value being a free gift, the almost universal 
rule is that the greater the earning power, and hence 
value, of land, the greater has been the expenditure of 
labor and capital, directly and indirectly, upon it, and the 
greater is the cost, in taxes, assessments, improvements, 
etc., of continuously utilizing and maintaining it. 

88. Rent Does Not Absorb AH Economic Gain. 
It is asserted by advocates of the single tax that because 
rent of land apparently tends to increase, therefore rent 
absorbs all the gain in wealth production. This is a com- 
plete mistake. The rent of a piece of land used in pro- 
duction increases only when and because that land be- 
comes more productive, yielding not merely enough to 
pay the higher rent but also a surplus to the user of the 
property. Where rent is rising rapidly it is the best of 
evidence that the wealth-producing capacity of the land is 
rising still more rapidly. If rent absorbed all the gain, 
everybody would prefer to hire cheaper property, by 
using which the same profits could be earned without the 
risk of a high rent investment. In reality, it is the high- 
est-rent properties that are most eagerly sought for, by 
those who have sufficiently large enterprises to conduct, 
because the profits that can be made by using such prop- 
erty are so much greater, even after paying the high rent, 
than could be realized in other and lower-rent situations. 
For example, the cities are the places of highest rents, 
and they are also the places of the largest surpluses of 
wealth produced over and above the rents. On Wall 
Street and lower Broadway rents are very high, but it is 
just there that business is most profitable. So far from 
rent absorbing the whole gain in production, it really 
represents, in all probability, a diminishing relative pro- 
portion of the total wealth produced, just as truly as in- 
terest on capital to-day represents a diminishing relative 



THE SINGLE TAX 1 59 

proportion of the earnings of industry. Interest rates 
are slowly falling, and rent, while nominally increasing 
in many quarters, is actually not increasing, but prob- 
ably decreasing, :in proportion to earning power. 

It should be remembered, moreover, that rents in some 
localities and sections are always falling while elsewhere 
they are rising. In the same city, even, some property is 
almost always declining in value while other property is 
increasing, according to changes in the drift of business, 
trade and residence. When rents were rising on the rich 
farms of the Northwest they were declining on the hill 
farms of New England, and some landlords were losing 
while others were gaining. It is not true, therefore, that 
land is a natural monopoly, constantly and everywhere in- 
creasing in value, and absorbing an increasing portion of 
the products of industry. There is no so-called "landlord 
class," in this country at least, for land is constantly 
changing ownership. It is simply one form of invest- 
ment, judged by comparison with the opportunities in 
manufacturing, mercantile and all other industries. If 
any particular land is exceptionally productive, whoever 
buys it must pay a proportionately high price for it, so 
that the return he receives in rent is not materially dif- 
ferent from what he would have received by putting out 
the same amount of money at interest. In fact, the price 
of land tends to rise or fall according as the rate of rent 
income on it becomes greater or less than the normal rate 
of interest on capital. 

89. Single-Tax Would Be Robbery. Land in this 
country changes ownership so often that by far the larger 
part of it is owned by persons who have bought and paid 
for it at its full value within, say, a generation. To them 
it represents actual cost, money, savings or whatever, in- 
vested in this land; while families that have held land 



l6o OUTLINES OF SOCIAL ECONOMICS 

for several generations have as a rule expended, first 
and last, considerable sums in improving and increasing 
its productive capacity or residential desirability. To tax 
away the full value of land, therefore, as the single-tax 
proposition demands, would be sheer robbery and would 
never be tolerated by a free people. The government that 
should attempt such an act of despotism would be swept 
away by revolution before it could begin to enforce it. 

90. It Could Not Abolish Poverty. The claim that 
the single tax would abolish poverty must be considered 
a delusion. If all the value of land were confiscated by 
a tax, nobody would care to own any, and land would 
then be taken by the state and become its property. So 
far as land is concerned, this would be socialism, but in 
what way would it affect poverty ? Who would get more 
if the state owned the land than at present? If the state 
owned the land it would become the landlord, and who- 
ever used it would merely have to pay rent to the state in- 
stead of to private owners. The rent exacted by the state 
would be governed by the same law as now, because it 
could not be governed by any other. If the state de- 
manded equal rent for all kinds of land, good or bad, near 
or far from markets, it simply could not get it. Nobody 
would hire any land except that which would yield more 
than the cost of using it. Nobody would pay rent for 
land so barren or far away that it took all the profits to 
pay the rent, whether the state owned it or anybody else. 
Even the state cannot make people continuously do busi- 
ness at a loss. The same different degrees of utility 
would exist in the land that exist now, and that would 
govern the rent anybody would pay for its use. There- 
fore, rents would either have to be the same as now, or 
the state, by trying to fix uniform rents, would have 
the larger part of the land left idle on its hands and the 



THE^SINGLE TAX l6l 

rest earning enormous profits for the fortunate occupiers. 

There is one primary condition without which nobody 
will use land, whether for building, agriculture, or any 
other purpose; and that is, a demand or market for the 
products. The single tax, therefore, could not compel 
people to use land which they were holding for specula- 
tive purposes. If there were not a sufficiently profitable 
opportunity for using the land, the owner would sur- 
render it to the government rather than lose money by 
trying to conduct an industry upon it while paying the 
government's assessed tax of the full rental value. The 
government could not force industries into existence in 
any such way, because that is a matter governed entirely 
by the market opportunities. 

Nor could the single tax do anything towards abolish- 
ing poverty by lowering prices to the consumers. Prod- 
ucts would not be cheapened by the fact that the state 
took all the rent, because prices would still be determined 
by the cost of production on the dearest land, as at pres- 
ent. It would cost just as much to utilize the poor or 
badly situated land for any given purpose then as it does 
now. The cost of production, therefore, would be the 
same ; the cost of the dearest portion would be the same, 
and hence prices would be the same. 

Real wages would not be increased by the single tax. 
Rent would have to be paid just as now, to the state as 
a tax, instead of to private landlords as rent, and, as we 
have just seen, the tax could not force industries into 
existence and so increase employment for labor. The 
only thing that the single tax would really accomplish is 
to establish government ownership of land. This would 
be a disadvantage, because the state is never as efficient 
in the use of any productive instrument as is private en 
terprise. This would neither increase the use of land, re- 



l62 OUTLINES OF SOCIAL ECONOMICS 

duce the price of products from the land, give a single 
additional laborer a day's work on land, nor do anything 
whatever to raise wages. The single tax is based on a 
false assumption. It will produce none of the results 
predicted for it, because it does not affect the economic 
conditions out of which these results arise. As a means 
of raising revenue, a tax on real property is far superior 
to any form of taxes on incomes and personal property, 
or any method of direct taxation, but a revenue tax 
should be levied only as required to meet government ex- 
penses or for public improvements, not for the purpose 
of confiscating private property regardless of the amount 
of revenue required. Instead of being a means of estab- 
lishing justice, the single tax would be nothing less than 
legalized robbery. As a means of abolishing poverty it 
is a delusion. 

SUGGESTED READING. 

In "Principles of Social Economics/' Section IV. of 
Chapter IV., Part III. This section discusses the ques- 
tion: "Is Rent a Social Tax? 7 ' and has already been sug- 
gested in connection with the chapter on Rent. 

Additional References. In Gunton's "Wealth and 
Progress," Section III. of Chapter I., Part II., on "Henry 
George's Theory" — of wages. 

In Hadley's "Economics," Sections 521 to 524 inclu- 
sive, in Chapter XIV. This chapter is on "Government 
Revenue," and the sections mentioned point out some of 
the economic and moral defects of the single-tax 
proposition. 

In Seligman's "Essays on Taxation," Chapter III., on 
"The Single Tax." 

In Francis A. Walker's "Land and Its Rent," Chapter 
III., on "Recent Attacks Upon Landed Property." 



THE SINGLE TAX 1 6 



The pamphlet, "Economic Heresies of Henry George," 
by George Gunton, is also recommended. 

For a complete statement of the single-tax doctrine 
see Henry George's "Progress and Poverty." 

EXTRACTS FROM READINGS. 

No Sudden Millennium Possible. "It is clearly impos- 
sible to discuss in this place the wider claim of the single- 
taxers, that the application of their scheme would intro- 
duce the social millennium. If economists thought that 
the distinguished single-tax leader had solved this prob- 
lem they would enthrone him high on their council seats ; 
they would reverently bend the knee and acknowledge in 
him a master, a prophet. But when he comes to them 
with a tale that is as old as the hills ; when he sets forth 
in his writings doctrines that have long since been re- 
futed; when in his enthusiasm he seeks to impose a 
remedy which appears to them as unjust as it is one- 
sided, as inconsistent as it is inequitable, — they have a 
right to protest. This is not the first time that some en- 
thusiast has supposed that he has discovered a world- 
saving panacea. The remedy for social maladjustments 
does not lie in any such lop-sided idea; the only cure is 
the slow, gradual evolution of the moral conscience ot 
mankind. We cannot solve the labor problem by any rule 
of thumb. Every student of history, of political philoso- 
phy, of economics, will tell us that the progress of the 
race has been slow and painful ; that the world has ad- 
vanced step by step ; and that each successive step, to be 
enduring, must be founded on justice. To suppose for a 
moment that the social millennium will be ushered in by 
any one sudden change — even were the change not so 
lamentably inadequate as the one above discussed — is an 



164 OUTLINES OFJSOCIAL ECONOMICS 

evidence not of wisdom, but of short-sightedness." — 
From Seligman's "Essays on Taxation," Chapter III. 

A One-Sided Proposition. "Now it is evident, beyond 
challenge or question by any honest man, that in a read- 
justment of the relations of land, made primarily to meet 
the demands of political equity, the state, if it will claim 
the benefit of all gain resulting from general causes af- 
fecting the numbers and productive power of the com- 
munity, and thus due neither to the merits nor to the 
sacrifices of owners, is bound to make good all losses re- 
sulting from a decline of demand due to causes which are 
of a general nature, and are thus attributable to no fault 
or neglect on the part of owners. If he who remains, in 
name, the proprietor of land is not to be allowed to reap 
any gain not brought about by his own exertions, he has 
a good claim to be saved harmless from loss which no 
effort of his could have averted." — From Walker's "Land 
and Its Rent," Chapter III. 

Fallacies in Single-Tax Theory. "In contradiction, 
then, of Mr. George's proposition that the entire effect of 
an increase of production is expended in raising rents, 
neither wages nor the interest of capital deriving any gain 
whatsoever' therefrom, rent indeed absorbing the entire 
gain, 'and more than the gain,' we have seen, — 

"i. That an increase of production may enhance the 
demand for labor equally with the demand for land. 

"2. That, in fact, in those forms of production which 
especially characterize modern society, the rate of en- 
hancement of the demand for labor tends to far exceed 
the rate of enhancement of the demand for land. 

"3. That an increased demand for the production of 
wealth may, and in a vast body of instances does, enhance 
the demand for labor without enhancing the demand for 
land in any, the slightest degree, the whole effect being 



THE SINGLE TAX 165 

expended in the elaboration of the same amount of ma- 
terial. 

"4. We have now only to show, in the fourth place, 
that, instead of all improvements and inventions increas- 
ing the demand for land, as Mr. George declares, some 
very extensive classes of improvements and inventions ac- 
tually operate powerfully, directly, and exclusively in 
reducing the demand for land, — we have, I say, only to 
show this, to convict this would-be apostle of a new po- 
litical economy and a regenerated humanity, jof the 
grossest incompetence for economic reasoning. This it 
will be easy to do." — From Walker's "Land and Its 
Rent," Chapter III. 

QUESTIONS FOR REVIEW OR DEBATE. 

1. What is the single-tax proposition? What does it promise? 

2. On what theory of land value is it based? 

3. How is the value of productive land really determined? 

4. How is the value of land used for residence purposes de- 

termined? 

5. What are some of the elements of cost in utilizing land? 

On what kind of land are these items actually, though 
not relatively, largest? 

6. Does rent absorb all the gain in wealth production? Does 

it take an increasing or relatively decreasing portion? 
Illustrate. 

7. Is all land increasing in value? Is there any permanent 

landlord class? Give reasons for answer. 

8. What great injustice would the single tax inflict? 

9. Would the single tax make land "free" to all comers? If 

not, what system of rent charges would the state as land- 
lord have to adopt? 
to. Could the single tax force unused land into use? Give 
reasons for your answer. 

11. What effect would it have on wages and employment? Why? 

12. What effect would it have on prices of commodities? Why? 



CHAPTER XX. 

COOPERATION AND PROFIT-SHARING. 

91. What Cooperation Is. Cooperation and profit- 
sharing are propositions for industrial reform, aiming at 
a better distribution of wealth. Cooperation is a form of 
socialism, though not of a political character. It is a 
voluntary effort to conduct specific industries on the 
strictly democratic plan. 

Hundreds of cooperative experiments have been made, 
during the last half century and more. Cooperation dif- 
fers from socialism in that socialism aims to have the 
government own and conduct all productive industry, 
while cooperation relies on voluntary, association and 
divides the results according to the amount of stock held, 
while the management is by majority vote of the stock- 
holders as individuals. 

92. Difference Between Cooperation and Corpora= 
tions. Sometimes we hear people speak of corporations 
as a form of cooperation. That is a distortion of the 
term. The difference is very great. Corporations are 
chartered companies in which, not only the profits are 
divided according to the number of shares held, but the 
management also goes with the ownership of the capital. 
If one man owns more than half he can have absolute 
management of the corporation, because by majority 
vote he can elect all the directors and dictate the entire 
policy. With cooperation the case is quite different. 
The profits, to be sure, are divided according to the capi - 

166 



COOPERATION AND PROFIT-SHARING 1 67 

tal, whatever that may be, and the owner of the largest 
amount of stock in a cooperative concern will therefore 
get the largest share of the dividends. But when it 
comes to the management the case is quite different. 
This, under cooperation, is thoroughly democratic. It 
assumes that one man knows just as much as another, 
which of course is not true. 

93. History of Productive Cooperation. Modern 
cooperative experiments came into existence about the 
middle of this century. The movement was the historic 
successor of the chartist movement in England. It grew 
out of the ruins of the Fergus O'Connor land-ownership 
scheme for poor people, which finally collapsed in 1848. 
Under the leadership of a few of the former followers 
of the Owenite movement and the radical chartists, co- 
operative experiments were made. These took two dif- 
ferent directions, one in productive enterprise, like manu- 
factures, and the other in mercantile or, as they call it, 
distributive enterprises. The history of these two lines 
of experimenting is very instructive and throws much 
light on the character and possibility of industrial co- 
operation. 

The first efforts were in manufacturing, and for a time 
they seemed very promising. The experiments were 
quite successful until they reached the stage of being 
what we may call established industries, when they came 
into steady competition with non-cooperative enterprises. 
Under the enthusiasm of the cooperative idea, the ex- 
periments extended through the greater part of Lan- 
cashire. Some of the largest cotton factories were built 
and equipped on the purely cooperative plan, and many 
people who did not believe in cooperation invested in 
them. But a quarter of a century saw the collapse of 
the entire cooperative experiment in productive industry. 



l68 OUTLINES OF SOCIAL ECONOMICS 

Democracy of management did what it nearly always 
does at the convention and ballot-box in politics ; it se- 
lected the superficial faultfinder, the popular sentimental- 
ist, and rejected the hard-headed and efficient business 
manager. The outcome was that to prevent bankruptcy 
and ruin one concern after another was converted into a 
regular joint-stock corporation. The cooperative ele- 
ment was dropped, and now the concerns are as success- 
ful as their average competitors. In other words, the 
experiment proved that in productive enterprise on any 
considerable scale, where the industry is complex and 
requires special skill and expert management, coopera- 
tion was an unqualified failure. 

04. Success of Mercantile Cooperation. In mer- 
cantile enterprise, however, it has been a signal success. 
In conducting grocery and haberdashery and general sup- 
ply stores, the cooperative plan has worked well from the 
first. Starting at about the same time that productive 
cooperation did in England, and at the same place, while 
cooperative manufacture has disappeared cooperative 
stores have multiplied and become very large, being in 
many respects superior to private concerns. The local 
cooperative stores have established wholesale stores 
which they jointly own and through which they make 
their purchases. They have their agents in different 
countries purchasing, on the best terms, supplies for all 
their various departments. 

What is the reason why the one kind of cooperation 
failed and the other has been such a marked success? 
Chiefly because productive cooperation requires expert 
talent, quick decision, inventive genius, and constant re- 
sourceful adaptation to conditions, in its management, 
while the other does not. The purchasing of materials, 
choice and operation of machinery, direction of experi- 



COOPERATION AND PROFIT-SHARING 1 69 

merits, application of inventions, are necessary in manu- 
facturing without much waiting. Mediocre effort and 
slow judgment, which the yearly or half-yearly meeting 
of the cooperative concerns furnished, put the manage- 
ment to a disadvantage. In selling its products it had to 
compete with concerns guided by individual enterprise 
and expert management. Clumsy methods, waste, and 
poor management could not succeed against the highest 
type of individual effort. When a cooperative concern 
failed to make profits the manager would be removed at 
the next annual meeting, and the man who made the 
strongest speech against the management would proba- 
bly be appointed, however little he might know about the 
business. 

In mercantile enterprises it was different. The man- 
agers were selected by the same method, but they sold 
goods to their own members. They did not have to go 
into competition with other firms on prices. They fixed 
their prices so as to cover their expenses, and coopera- 
tive prices were often from ten to fifteen per cent, higher 
than the prices of private concerns. But this secured the 
enterprise against loss and always insured a dividend, be- 
cause prices could always be put to a point where they 
would yield a dividend at the end of the quarter. This 
was a seeming net gain to the members of the coopera- 
tive associations. At any rate, it acted as an automatic 
savings institution. It was the rule of the cooperative 
stores to compel the members to leave their dividends 
until they acquired a share in the business, of a certain 
amount, upon which they would always receive interest. 
In this way the stores never failed, and they gradually 
grew from grocery stores into large department stores, 
supplying everything from bread and butter to the mi- 
nute furnishing of a home, and later even providing 



I/O OUTLINES OF SOCIAL ECONOMICS 

houses on the installment plan. Being free from com- 
petition on prices their permanence was secured, and 
establishing their own wholesale stores yielded a great 
economy in business. 

This distributive cooperation in England also had so- 
cial and educational features. They erected their own 
buildings and in each one would usually have a lecture- 
hall free for all purposes of the association, a library, a 
well-appointed reading-room, and sometimes excellent 
courses of lectures. In this way they conducted, as a 
part of the expense of the business, an educational work 
which was very beneficial and has been a great factor 
in the intellectual and social improvement of the people. 

The secret of the success of this phase of cooperation 
is that it does not have to be on its merits as an economic 
proposition. The owners of each store are themselves the 
purchasers of its products. The stores buy their goods 
in open market and sell to their own members. When it 
has been attempted, as under productive cooperation, to 
produce by the members and sell in the open market it 
has failed. Moreover, conducting a mercantile business 
is a much less complex matter than operating highly-de- 
veloped manufacture. Being free from competition as 
to prices, cooperative stores succeed with mediocre tal- 
ent. This indicates that cooperation on a purely demo- 
cratic basis can succeed only in lines of industry where 
the methods are relatively permanent and simple, and not 
subject to the revolutions which invention and expert 
management by competitors may create. Where the 
undertaking is subject to competition with private con- 
cerns, and the methods are complex and subject to sud- 
den changes by the introduction of new methods, then 
mediocre management by popular election on the co- 
operative plan is in great danger of failure. 



COOPERATION AND PROFIT-SHARING 171 

95. Profit=Sharing. Profit-sharing is quite distinct 
from cooperation. It is a system of distributing a part 
of the profits of an industry among the employees, but 
keeping the control and management in the hands of the 
capitalist. In other words, it is cooperation in results, 
but not in responsibility and management. The difficulty 
with profit-sharing is that it is entirely dependent upon 
profit-making. It can never be a universal plan of dis- 
tribution, because all concerns do not make profits. 
Profits can only be "shared" by the successful. More- 
over, it depends largely upon the personal disposition of 
the employer. It must be voluntary with him, and so take 
the form, to some extent, of a gratuity. It is declared by 
some who have tried it that to distribute a certain portion 
of the profits in this way yields better results and better 
selection of laborers. But this is chiefly because only the 
few do it. If every concern divided profits among em- 
ployees -it would give no advantage in the selection of la- 
borers, because they would get the same wherever they 
went. If profit-sharing were made compulsory on all 
employers it would become a part of the cost of produc- 
tion for all the poorer and dearer concerns, and either 
prices would have to be raised or wages would have to be 
reduced so that what the men had received in wages could 
be given as profits. In fact, it is frequently the case in 
profit-sharing experiments that the laborers get no more 
than what they would receive in higher wages if they 
could not rely on this small extra income. The law of 
the standard of living operates to lessen the pressure 
from workingmen for more wages, when their earnings 
are pieced out by semi-gratuities in this way. 

Profits cannot be relied upon. They differ in amount 
with almost every concern, and sometimes are missing 
entirely. Therefore profit-sharing can never be a general 



172 OUTLINES OF SOCIAL ECONOMICS 

policy in the community. If a law were passed compell- 
ing all those who have profits to divide them among their 
laborers the probability is that capitalists would cease to 
experiment and invest with a view to making profits. 
Such a policy would stop the creation of profits, and 
therefore destroy the possibility of lowering prices, which 
would be an arrest of industrial progress. Profits are 
the stimulus to special and new risk-taking efforts. Any 
system which distributed those profits, as such, among 
other people would destroy the incentive for new creation 
of wealth. By the natural economic method of distribu- 
tion, profits do eventually go to the laborers and the com- 
munity, through lower prices, higher wages and taxation 
for public improvements, while allowing them to pass to 
the captalist long enough to furnish a constant stimulus 
to industrial improvement. 

Mercantile cooperation, though not feasible as a uni- 
versal method of conducting industry, has strong social 
merits. Where it can be successfully applied it may, as 
in England, carry with it great socializing and educa- 
tional opportunities, the influence of which is elevating 
and stimulating, even though paid for sometimes in 
higher prices. But profit-sharing has nothing of this char- 
acter to recommend it. It is not economic, it has no social 
or educational aspect, but it has in it an element of philan- 
thropy, which is not wholesome. Whatever is desired to 
be of permanent value in the distribution of wealth must 
be capable of universal application. Anything which de- 
pends on the sympathy or personal goodness of the em- 
ployer, and can only be granted by a part of the indus- 
tries, cannot lead to any widespread social and industrial 
reform. 



COOPERATION AND PROFIT-SHARING 1 73 

SUGGESTED READING. 

In Hadley's "Economics," Chapter XII., on "Coopera- 
tion," which includes discussion of profit-sharing, pro- 
ducers' and consumers' cooperation, and government 
management of industry. 

In N. P. Gilman's "A Dividend to Labor," Chapters I. 
and II., discussing the general possibilities of coopera- 
tive and profit-sharing experiments. In George Howell's 
"Conflicts of Capital and Labor," Chapter XII., on 
"Labor and Capital in Alliance," describing and discuss- 
ing numerous experiments in cooperation and profit- 
sharing, in a very friendly spirit but not overlooking 
obvious defects. 

In David Schloss's "Methods of Industrial Remunera- 
tion," Chapters XVI. to XXIX., inclusive. These chap- 
ters take up the theory and practice of cooperation and 
profit-sharing quite at length, while the Appendix de- 
scribes in detail a number of practical experiments. 

EXTRACTS FROM READINGS. 

Risk to Laborers of Profit-Sharing. "Why tempt a 
working-man to gamble by staking part of the reward 
of his labor upon the financial results of a business over 
the conduct of whose financial operations he is not al- 
lowed to possess any control, and would, perhaps, sel- 
dom be competent, even if he were allowed, to exercise 
any useful control? To invest in this manner in the en- 
terprise carried on by his employers is a risky thing for 
a working-man, even when the investment is of a tem- 
porary nature only; that is, when the bonus is paid in 
cash at the end of the year. But, where, as is often the 
case, a large part of the bonus is placed to the credit 
of a Provident Fund, and, as such, becomes part of 



174 OUTLINES OF SOCIAL ECONOMICS 

the permanent capital of the business, there it is clear 
that a working-man, whose savings are locked up in an 
unsecured investment of this nature, must, in very many 
cases, run a grave risk of losing his money. Is the work- 
man expected, before he accepts employment in a profit- 
sharing firm, to make inquiries from his stock-brokers 
or his bankers as to the standing of the concern and as 
to the reputation for business ability possessed by its 
directors? Or is he to 'chance it?' We may well de- 
mur to inviting working-men to hazard their earnings in 
this manner, whether for one year or for forty." — From 
Schloss's "Methods of Industrial Remuneration," Chap- 
ter XXII. 

Some Results of English Cooperation. "The follow- 
ing is the account of the Sun Mill [England] given by 
Miss Potter. 'In this instance workers were largely 
shareholders, and at the outset a resolution was passed, 
insisting that shareholders and their families should be 
preferred for employment. ... I am informed at 
the present day that few, if any, of its employees happen 
to be shareholders. Profit-sharing with the principal 
employees was introduced in 1869; in 1875 it was dis- 
continued.' . . . Mr. Marcroft* the historian of the 
Sun Mill, adds that the recipients of bonus had been re- 
duced in their wages, and that on its discontinuance their 
wages were raised 20 per cent. This mill, says Miss Pot- 
ter, serves as a type of the general history of cotton fac- 
tories primarily established in the interests of the actual 
workers. . . . 

"In conclusion, the results of our examination of the 
practice of Industrial Cooperation shows us that by far 
the greater part of Industrial Cooperation is carried on 
upon the ordinary wage-system, the employees being 
altogether excluded from participation in profits; while. 



COOPERATION AND PROFIT-SHARING 1 75 

that in those cases in which profit-sharing is practised by 
working-men cooperators the financial position of the 
workmen employed in a cooperative workshop is sel- 
dom indeed to any appreciable extent improved by the 
receipt of bonus, must be abundantly clear from the facts 
and figures above adduced." — From Schloss's "Methods 
of Industrial Remuneration," Chapter XXIV. 

QUESTIONS FOR REVIEW OR DEBATE. 

i. What is meant by industrial cooperation? 

2. What is the difference between cooperation and corpora- 

tions? 

3. What experiments in productive cooperation have been 

made in England and with what result? 

4. Explain the reasons for the outcome of these undertakings. 

5. What has been the experience with mercantile or distributive 

cooperation? Describe some of the industrial and edu- 
cational features of these concerns. 

6. Why have they resulted so differently from productive co- 

operation? 
7. How does profit-sharing differ from cooperation? 

8. Could profit-sharing ever be adopted as a universal system? 

Give reasons. 

9. What effect does profit-sharing tend to have on wages? 



CHAPTER XXL 

LABOR ORGANIZATIONS. 

06. Objects of Trade Unions. Trade unions are vol- 
untary associations of workingmen, with the object of im- 
proving the general conditions of their class. They are 
very different in character, object and methods from 
either cooperation or profit-sharing. Trade unions are 
organized not to overthrow or supersede the wages sys- 
tem, but to better the laborers' condition under it. They 
recognize the advantages of the wages system, and en- 
deavor to work through it to secure higher wages and 
shorter hours and better conditions rather than to com- 
pel a distribution of profits as such. They are not based 
upon any theory of socialism or radical rearrangement 
of society, but recognize the fact that the capitalist owns 
the plant and the laborers own their labor, and the rela- 
tion between them is one of buying and selling service, 
and agreeing on the conditions of work. 

Having learned by experience that wages in any in- 
dustry in any given district are substantially the same, 
and when increased or diminished for one are in- 
creased or diminished for all — in other words, that 
wages are determined for the group and not for the 
individual — the laborers have organized on the group 
plan. They have learned that if they are treated as 
a group by employers it is better that they act as a 
group for themselves. The object of trade unions is 
primarily to represent the interests of the workingmen 

176 



LABOR ORGANIZATIONS 177 

in the various industries, in respect to wages, hours of 
labor, treatment of employees and other working 
conditions. 

For this reason trade unions have almost always 
avoided taking part as organizations in any political 
movement. Indeed, it is a by-law of nearly all the unions 
in this country that discussion of politics shall be pro- 
hibited in their meetings. In political matters they act as 
individuals. On matters of wages, trade conditions, any- 
thing affecting their industrial life, they act as a unit. 

97. Early Trade Unions. Trade unions arose in 
England, for the same reason that nearly all modern in- 
stitutions arose there, because from the fourteenth cen- 
tury England had taken the lead in Europe in industrial 
and political progress. The trade-union movement is the 
necessary outcome of the wages system, which is in- 
separable from capitalist methods of industry. As the 
capitalist system was earliest and most strongly devel- 
oped in England, it followed as a matter of course that 
trade unions had their rise in the same country. It is 
sometimes said that trade unions arose out of the me- 
diaeval town "gilds/' but there is little historic data to 
sustain this view. The modern trade union has very lit- 
tle in common with the mediaeval gild, which included in- 
dependent craftsmen and had nothing to do with any dis- 
tinct wage class. The trade union did not arise until the 
gilds had disappeared. It is the product of the capitalist 
industry of the eighteenth and nineteenth centuries, and 
arose out of the conditions resulting from the factory 
system. 

During the early part of this century the efforts of 
laborers to organize, or even for three laborers to meet 
in the same room to talk over their wages or other con- 
ditions, was treated as conspiracy. This restriction con- 



178 OUTLINES OF SOCIAL ECONOMICS 

tinued until 1824, when the conspiracy laws were abol- 
ished, but for a long time afterwards trade unions were 
under a social and quasi-legal ban. They were regarded as 
revolutionary, as infringing on the rights of private prop- 
erty. The popular theory was that the employer had the 
sole right to say what hours his people should work, 
when begin and when stop, what wages should be paid, 
and what sanitary and other conditions should exist. The 
employers' ideas on all these points were narrow, often 
actually inhuman. The excessive length of the working 
day, the driving pressure of the boss, the unwholesome 
conditions of the workshop and the degrading hovels in 
which the laborers lived, were such as to destroy the 
health and debase the social and moral life of the work- 
ing people. Numerous new diseases and types of de- 
formity, contracted chests and curved spines, were de- 
veloped. Against this the laborers organized, and at first, 
very naturally, they were scarcely less narrow and crude 
in their ideas and methods of procedure than were their 
employers. They thought the only effective way to pro- 
ceed was to destroy the employers' property, get up 
strikes, blow up factories, and if necessary maltreat or 
kill any laborers who should attempt to take their places. 
But, while their methods were frequently brutal, their 
complaints were genuine. This became too obvious to 
be overlooked by decent and humane people. Attempts 
at reform began as early as 1825, and continued until a 
whole series of improvements in the laborers' conditions 
were accomplished. Night work for women and chil- 
dren was abolished, the working day shortened, school- 
ing provided for factory children (the half-time system 
being introduced in 1844), until in 1847 tne general ten- 
hour law was passed, and in 1874 the nine-and-a-half 
hour law for textile industries. 



LABOR ORGANIZATIONS IJq 

98. How the English Factory Acts Were Passed. 

This great success of the trade unions in England, in 
the way of labor legislation, was due more largely to 
political class feeling than to the efforts of the unions 
themselves. At that time a bitter struggle was going on in 
England over the so-called corn laws, which imposed a 
high tariff on the importation of wheat and breadstuff s. 
These laws, of course, were directly in the interest of the 
landed class, and were opposed by the manufacturers, 
who wanted cheap bread for the laborers, so that they 
could live on low wages. 

This manufacturing or "middle class" had already 
gained largely in power through the extension of the 
voting franchise in 1832, and in 1839 they organized the 
"Anti-Corn-Law League." At the same time the work- 
ingmen were demanding shorter hours of labor, restric- 
tion of child labor, and improvement in working condi- 
tions, all of which the manufacturers opposed. Now the 
landed aristocracy were a cultivated class, inclined to be 
humane and considerate though very patronizing and 
paternal. They were opposed to giving the laborers any 
political power, but they never treated them like beasts 
of burden. Being desperately opposed to the manufac- 
turers' crusade for repeal of the corn laws, the aristocracy 
sided with the laborers in their demand for the factory 
acts. Indeed, Lord Ashley, afterwards the Earl of 
Shaftesbury, became the real leader of the short-hour 
movement. In 1846 the manufacturers succeeded in get- 
ting the corn laws repealed, whereupon the landlords 
united in behalf of the laborers' movement. The next 
year, 1847, partly out of human sympathy for the 
laborers, partly out of a sense of justice, but very largely 
out of chagrin over the repeal of the corn laws, the land- 
owners voted for the ten-hour law and carried it. Thus 



l8o OUTLINES OF SOCIAL ECONOMICS 

in reality the great labor legislation of England was due 
more to the class war between the landowners and manu- 
facturers than to the united efforts of the laborers. 
99. Trade Unions in the United States. In the 

United States the first law limiting the hours of labor 
was adopted in Massachusetts in 1874, the same year that 
practically the last important one was adopted in Eng- 
land. This, however, does not mean that the English 
trade unions were superior either in intelligence or ac- 
tivity. The factory system, and with it labor unions, be- 
gan much earlier in England than in the United States. 
It had practically no existence in this country until about 
1830, and took on no great importance until after the civil 
war. The trade-union movement here has grown up 
under conditions entirely different from those in Eng- 
land. There was no class war outside of the labor ranks 
to help American unions. They came into existence as 
the factory system developed, particularly in the cotton 
and shoe industries in New England. The employing 
class here acted almost exactly as they had done thirty 
years earlier in England ; used the same arguments 
against shortening the hours, made the same false pre- 
dictions and the same silly threats. There was no landed 
class here to combine forces with the laborers, but the 
laborers in the United States had a power that the Eng- 
lish laborers did not — the ballot. They were a political 
force from the beginning. They had the right and they 
had the wisdom to unite on candidates for the legisla- 
tures who were in favor of their cause, and thus, in a 
much shorter time than in England, secured important 
factory legislation. 

During the last twenty-five years the trade-union 
movement in this country has made great progress, and 
really shown a higher grade of economic intelligence than 



LABOR ORGANIZATIONS l8l 

has the movement in England. In England it has in a 
considerable degree drifted away from strictly economic 
purposes into the socialistic "Fabian" movement, known 
as the "new trade-unionism." It has turned its attention 
to electing members of parliament, and with one or two 
exceptions they cut sorry figures in the house of com- 
mons. It may be said that to the extent that English 
trade-unionism has passed into semi-socialism it has de- 
generated as an economic force. Thus far, American 
trade unions are distinct from any socialistic organiza- 
tions. They are best represented by the American Feder- 
ation of Labor, which is a voluntary general association 
of unions in all the principal industries of the country. 
They are strictly adhering to their economic purposes 
and methods, eschewing both socialism and politics. In 
their literature and lecture work they show a grade of 
economic intelligence quite superior to that of the Eng- 
lish unions ; their discussion of economic problems, of 
the relation of labor to the public and to the employing 
class, has altogether a higher scientific character. Their 
latest proposition, to establish a trade-union college for 
'the education of trade-unionists and preparation of 
writers and speakers as leaders of the labor movement, 
will, if carried out, be the most advanced step ever taken 
by a labor organization in its own behalf. With every ad- 
vance in this direction, greater intelligence, better infor- 
mation and more rational conduct will prevail in indus- 
trial disputes, and the element of force will give place to 
reason in adjusting labor differences and solving labor 
problems. 

SUGGESTED READING. 

In "Principles of Social Economics," Chapter VII. of 
Part IV. to the middle of page 423. This chapter is on 



1 82 OUTLINES OF SOCIAL ECONOMICS 

"Combination of Labor/' and the portion suggested deals 
with the place of labor organization in economic progress. 

Additional References. In Howell's "Conflicts of Cap- 
ital and Labor," Chapters II., III. and XIV. Mr. Howell, 
who is a Fellow of the Statistical Society, England, is 
very favorable to labor organization, and these chapters 
deal with the origin, history, objects and government of 
trade unions, with a general review of their past and 
forecast of their future. 

In Lujo Brentano's "Relation of Labor to the Law of 
To-Day," Chapters VII., XL, XIV. and XV. of Book I., 
discussing the origin of unions, early laws against them, 
their progress in England, and some of their objects and 
methods. 

In Carroll D. Wright's "Industrial Evolution of the 
United States," Chapters XVIII., XIX. and XX., of 
Part III. These chapters describe the labor movement 
in the United States, with a history of some of the great 
labor organizations, etc. 

Probably the. most complete history of the rise of 
organized labor is the "History of Trade-Unionism," 
by Sidney and Beatrice Webb; this will be found very 
useful, especially for reference. 

EXTRACTS FROM READINGS. 

What Trade Unions Have Done. "It is not so much, 
however, in specific performances that their [trade 
unions] record of work is seen to the greatest advantage. 
It is rather in those unrecorded fields of labour, which 
constitute the every-day-life work of the unions, that they 
display their power, wield their influence, and achieve 
their more permanent successes. The improved condi- 
tion of the working- classes to-day is largely due to their 
efforts. The improvement has been slow, terribly slow; 



LABOR ORGANIZATIONS 1 83 

and it is not so apparent to the younger generation as to 
those whose age and experience take them back to the 
"forties" and the "fifties" of the present century. The 
progress, nevertheless, has been real and substantial, in 
material advantages — wages and hours of labor; in so- 
cial position — by the recognition of industrial rights ; in 
political status — by enfranchisement, and election to the 
highest posts open to popular election; in constitutional 
rights and judicial obligation — by the repeal of repressive 
and disabling laws, and by the enactment of more just 
and equitable enabling laws. Equality before the law is 
not only recognized as an abstract principle, but is em- 
bodied in statutory enactment, not in its fullness, per- 
haps, but generally; and even in the administration of 
justice the position of workmen has improved enor- 
mously of late years." — From Howell's "Conflicts of 
Capital and Labor," Chapter XIV. 

Unions and Individual Workers. "The whole indus- 
trial policy of the trades unions is calculated for the 
middling stamp which everywhere predominates. What- 
ever industrial efforts we find among them, the principle 
permeating all these is the care that the great mass of 
laborers endowed with average capabilities may be able 
to live from their labor, and in this, moreover, the trades 
unions show themselves as the necessary supplement of 
political economy built upon the foundation of perfect 
freedom. . . . The same freedom which led the 
highly endowed to the unhindered development of their 
powers, led that great mass of those standing in the 
middle to confederation into trades unions. And whilst 
trades unions have not hindered the most skillful laborers 
in obtaining the greatest possible advantage from their 
special capabilities ; whilst, for example, the great mass 
of superintendents and overseers in engineering, and the 



184 OUTLINES OF SOCIAL ECONOMICS 

great number of administrators and directors at one time 
or another have been members of the trades union of 
engineers, indeed, belonged to their founders; whilst we 
have the express testimony of employers who were hos- 
tile to the trades unions that their activity in no way di- 
minished the number of laborers who have elevated 
themselves above their order, the trades unions have pre- 
served the mass endowed with average capabilities from 
ruin, and have educated up to that point a number of 
laborers who left to themselves would not have reached 
the middling class." — From Brentano's "Relation of 
Labor to the Law of To-Day," Chapter XV., Book I. 

QUESTIONS FOR REVIEW OR DEBATE. 

1. What are trade unions? With what kind of matters do they 

concern themselves? 

2. Why are they necessary under modern industrial conditions? 

3. Describe the origin and early experience of trade unions. 

Against what evils did they struggle? 

4. How were the English factory acts secured? 

5. Name some of the more important laws in behalf of labor 

enacted in England. 

6. When and where was the first law limiting the hours of labor 

passed in the United States? 

7. What power have American laborers possessed that English 

laborers did not, in obtaining factory legislation? 

8. What is the present trend of English trade unions? 

9. Along what lines are American trade unions working to-day? 



CHAPTER XXII. 
labor organizations. (Continued.) 

ioo. Economic Character of Trade Unions. Of all 

the kinds of labor organizations, trade unions alone are 
strictly economic in character. Practically every other 
form of labor association is more or less socialistic or 
political. The trade union is organized strictly for the 
industrial and social improvement of the members of a 
particular trade or industry. The American Federation 
of Labor organizes the trade groups or the different craft 
organizations into one general body, but this federation 
is only for cooperative purposes. Each union and each 
group of unions in specific trades remains as distinctly 
devoted to its particular industry as if there were no 
federation. 

The purpose of the trade union is economic; that is, 
it deals directly with industrial conditions, such as hours 
of labor, wages, employment of women and children, and 
other matters that relate to the workshop side of life. 
This is the real secret of the strength of trade unions. 
They have not ebbed and flowed like the socialistic and 
political labor organizations. They have never been 
stronger than they are now, with the public and the em- 
ployers. They began with being extremely unpopular — 
so unpopular that they were deemed conspiracies. But, 
year by year and decade by decade they have persisted. 
No amount of political condemnation, social ostracism or 
moral censure seems to have affected their growth. They 

185 



1 86 OUTLINES OF SOCIAL ECONOMICS 

encounter defeats, get under bad leadership, become the 
victims of political demagogues, and at times have seemed 
to go to pieces under the exposure of fraud or the gross 
mistakes of hotheaded, ignorant leadership. Neverthe- 
less, while particular unions may go through this expe- 
rience, it is never true of all unions in any trade, or of all 
trades in any country at a given time. It is very much 
like a backsliding deacon or vestryman, whose misbe- 
havior is a shock to the church, but they reorganize and 
go ahead. A necessary and useful organization seldom 
dies from such a cause. 

Trade unions persist because they are a natural and, in 
the present state of civilization, necessary feature of in- 
dustrial society. They are the most efficient means ex- 
perience has presented by which laborers can make their 
desires for improvement effective. 

The mistakes and misfortunes of trade unions, which 
seem so conspicuous, are relatively few, compared with 
the general success. The demagogue is not nearly so 
prevalent in trade unions as in political parties, and when 
he does appear in the trade unions he is frequently the 
agent of some political machine, trying to use the labor 
organization for political ends. 

101. Advantages of Labor Organization. There are 
two respects in which the trade union is permanently 
beneficial to the wage earners : one is in its constant 
vigilance over wages, hours of labor and conditions of 
employment, the other is in its educational influence on 
its members. 

The unions are constantly on the alert for higher 
wages and better working conditions. They are the 
means through which the expanding and improving 
standard of living of the wage earners expresses itself 
and brings pressure to bear for higher wages. Every 



LABOR ORGANIZATIONS 1 8? 

time the unions succeed in getting a higher wage rate, 
transferring children from the workshop into the 
school, shortening the working day, improving the 
sanitary surroundings, etc., they secure an improve- 
ment not merely for their own members but ulti- 
mately for all wage-earners who are near enough to come 
at all under the touch of the same influences. It is fre- 
quently urged against trade unions that they represent 
only a fraction of the laborers, but they really do the 
fighting for the whole group. For instance, when wages 
in any trade are increased the rise is seldom limited to 
the members of the unions who have made the struggle 
and lost weeks and months possibly in a strike to secure 
it. These may not constitute more than 15 or 20 per cent, 
of the total laborers in the trade, but when the increase is 
gained it is for all. Those laborers who did not join the 
union, who would not help the strike, and often were 
the first to complain about the fat salaries of the labor 
leaders, to which they contributed nothing, share in the 
benefits gained by the efforts of organized laborers. 

Moreover, the benefits thus secured are for the most 
part permanent. When the wages of, say, carpenters, 
bricklayers, painters or machinists, have by persistent ef- 
fort been raised to $3.50 or $4 a day, they can almost 
never be forced down again to $2 or $2.50 a day. Even 
where wages are pushed down from a high point under 
an industrial depression, they mount up again to the old 
mark immediately on the return of prosperity. So that, 
in reality, each step gained becomes a permanent acqui- 
sition to the welfare not of the members of the trade 
unions alone but of the whole craft. 

The second important respect in which trade unions 
are a permanent benefit to the laborers is in the oppor- 
tunities of economic education they afford. The regular 



1 88 OUTLINES OF SOCIAL ECONOMICS 

meetings, definite interests, and centering of attention 
upon purely economic topics, makes frequent discussion 
of this kind of subjects necessary. At almost every meet- 
ing of the union some complaint or idea is presented, or 
new demands — some of them very unreasonable, — and 
these have to be discussed. The more conservative ele- 
ment is constantly repressing the enthusiastic or warlike 
spirit of the less cautious, and so these discussions are 
good training. They force those who take part in them to 
be well equipped and under the necessity of finding out 
the facts, collecting information. 

The federation of these organizations is a great step. 
It creates a central body to which grievances can be sub- 
mitted before strikes are ordered. This compels each 
union to collect data and present arguments to establish 
a plausible case. It also tends to create a conservative 
judicious quality in those who have to pass upon these 
contests, because responsible leaders lose their reputa- 
tion and prestige in proportion to the mistakes the organ- 
izations make. Very much more than the public im- 
agines, it is a constant struggle with most labor leaders 
to keep peace in the ranks and prevent the hot-heads from 
bringing on useless conflicts with employers. All this is 
highly educational in its influence, and the effect is quite 
marked on the conduct of trade unions to-day as coin- 
pared with twenty or thirty years ago. 

102. flistakes and Needs of Unions. The mistakes 
of trade unions are largely due to the lack of these con- 
servative and educational influences. Too frequently it 
happens that when a union is very strong its members 
insist upon being dogmatic and even despotic. They 
become as overbearing in their rules and regulations and 
in exactions from employers as employers ever were to- 
ward laborers when there were no unions. 



LABOR ORGANIZATIONS I 89 

Often, even yet, powerful unions either resort to brute 
force or seem to countenance it, in the conduct of strikes. 
These mistakes have done and always will do trade 
unions incalculable harm, so long as they are continued, 
but it should not be assumed that they overbalance the 
good these organizations are doing. The remedy lies in 
more and more education. The unions should and must 
observe the principles of ordinary fairness and act in ac- 
cordance with economic laws. 

Many charges are made against trade unions which are 
not and never were true. For instance, it is commonly 
asserted that it is a trade-union rule that no member 
shall receive more than a certain amount of wages. This 
is not true. There never was any need for such a rule. 
There never was any danger that employers would pay 
too high wages to anybody. The rule that trade unions 
have tried to enforce is that no member shall be paid 
less than a certain amount, and it is probably true that in 
enforcing this rule they have often compelled employers 
to pay some inferior workmen more than they were 
worth. The employers' remedy for that is to not employ 
inferior men. The union's function is to keep up the 
standard of wages, and the employers must keep up the 
standard of the workmen's efficiency. 

Of course, it would be a great help in this direction if 
unions would always exercise their influence in behalf of 
good workmanship, by saying that a laborer must be 
competent in order to have the protection of the union. 
In some trades this has already come to be the rule. There 
are some unions, like that of the locomotive engineers, 
which a man cannot join unless he is a competent engi- 
neer, and, on the other hand, the union insists that no 
engineer shall be employed who is not a member of the 
union. There is a sense in which this is justifiable. If 



I90 OUTLINES OF SOCIAL ECONOMICS 

the union will insist that its members shall be competent 
workmen, the capitalists will have an interest in select- 
ing only union men. There are some railroads which 
recognize this, and when they want an engineer go to 
the union for him, and hold the union responsible for his 
competency. Thus there is a moral responsibility upon 
the union for the efficiency, sobriety and other qualities 
of the workman, the effect of which has been very satis- 
factory. It is along these lines that trade unions need 
further and higher development. In spite of all their de- 
fects trade unions cannot be suppressed any more than 
corporations can be wiped out and hand-labor industry 
restored. The remedy for the defects of trade unions 
lies in improvement through economic education and 
greater moral responsibility. To provide more education 
and emphasize this moral responsibility are the two most 
important duties of trade unions today. 

SUGGESTED READING. 

In "Principles of Social Economics," from the middle 
of page 423, in Chapter VII., of Part IV., to end of chap- 
ter. This is the remaining portion of the chapter on 
"Combinations of Labor," and discusses the economics of 
labor unions and their necessity in modern industry. 

Additional References. In Howell's "Conflicts of Cap- 
ital and Labour/' Chapter IV., on "Political Economy 
and Trade Unions"; also Section I. of Chapter IX., on 
"Strikes — Their Objects, Cost and Results." This last 
is especially sensible and wholesome, and is strongly rec- 
ommended. 

In Brentano's "Relation of Labor to the Law of To- 
day," Chapter XII., of Book II., on "The Solution of the 
Labor Question," 



LABOR ORGANIZATIONS 191 

In Carroll D. Wright's "Industrial Evolution of the 
United States," Chapters XXIV. and XXV. of Part III., 
describing some of the famous labor controversies and 
strikes in this country. 

In Francis A. Walker's "Wages Question," Chapter 
XIX., of Part II., in which he gives an affirmative an- 
swer to the question : "May any Advantage Be Acquired 
by the Wages Class through Strikes or Trades Unions ?" 

EXTRACTS FROM READINGS. 

Losses and Gains of Strikes. "It may at once be con- 
ceded that the cost of a prolonged strike is enormous and 
that the distress which it occasions is ofttimes appalling; 
but workmen would not undergo all this suffering, and 
contribute their hard earnings week after week, in sup- 
port of those engaged in the struggle, if there were no 
corresponding advantages to be gained from the outlay. 
It would be tedious to attempt to tabulate the estimated 
cost of strikes during the present century; and it would 
serve no useful purpose, unless we were able at the same 
time, to estimate the commercial value of every success- 
ful one, and strike a balance of profit and loss. This 
could not possibly be done, even if the calculations em- 
ployed were as profound and difficult as those used in 
astronomy, for there is no rule in mathematics, or stand- 
ard of computation, in any of the known tables, by which 
to arrive at any definite result or satisfactory conclusion. 
There is, in fact, absolutely no comparison between the 
cost in pounds sterling and the gain, material and moral, 
which has accrued to the working classes from some of 
those labor struggles, comprehended in the term 
'strikes.' " — From Howell's "Conflicts of Capital and 
Labor," Chapter IX. 



I92 OUTLINES OF SOCIAL ECONOMICS 

Strikes Sometimes Necessary. "I cannot conceive how 
one can look at the condition of the manufacturing opera- 
tives as they were left at the repeal of the iniquitous com- 
bination acts in 1824, and question that the early strikes 
in England were essential to the breaking up of the power 
of custom and of fear over the minds of the working 
classes, habituated to submission under the terror of 
laws now universally recognized as oppressive, unaccus- 
tomed to concerted action, illiterate, jealous, suspicious, 
tax-ridden and poverty-stricken. ... It is well enough 
for the peace of industrial society and the mutual under- 
standing of all parties, that masters should be made to 
know that two can play at the same game. There is noth- 
ing to quicken the sense of justice and equity like the 
consciousness that unjust and inequitable demands or 
acts are likely to be promptly and fearlessly resisted and 
resented." — From Walker's "Wages Question," Chapter 
XIX. 

QUESTIONS FOR REVIEW OR DEBATE. 

1. Why may trade unions be called strictly economic organiza- 

tions ? 

2. In what two chief particulars are unions beneficial to wage 

earners? 

3. In what way do the other laborers share in the benefits 

gained by the unions? 

4. What effect have unions on the permanent welfare of the 

wages class? 

5. In what way do trade unions exert an educational influence 

on their members? 

6. What are some of the chief complaints against trade unions? 

7. To what are these mistakes chiefly due? 

8. What is the true remedy for these errors? 

9. What rule have some of the more advanced unions adopted 

as to qualifications of their members? 



CHAPTER XXIII. 



PANICS AND DEPRESSIONS. 



103. Difference Between Panics and Depressions. 

Panics and industrial depressions are forms of business 
disturbance peculiar to modern industry. A panic is a 
sudden alarm concerning the safety of money and invest- 
ments; it always arises in financial and banking centers. 
It is a financial fright, and affects financial interests very 
much as an alarm of fire affects the occupants of a 
theatre. The moment the cry of fire is heard, without 
stopping to learn the facts or the safe way of acting, all 
imagine the worst, lose self-control and make a frantic 
dash to escape. In doing so they produce chaotic con- 
fusion so that nobody can act intelligently, and the 
weaker ones are ruthlessly trodden under foot. This is 
practically what occurs in the money centers when a 
financial panic suddenly arises. 

A business depression is different. It may arise as the 
outcome of a money panic or from a variety of other 
causes, but usually it is due to a falling off in the market 
demands for products. Buyers grow more reluctant to 
place orders, they hesitate, purchases dwindle, and as a 
result producers slacken their efforts or close their works, 
necessarily bringing enforced idleness and hardship upon 
the community, 

104. Causes of Business Disturbances, The imme- 
diate causes of these two kinds of disturbances are nu- 
merous, but traced to the source they are essentially the 

i93 



194 OUTLINES OF SOCIAL ECONOMICS 

same. Both panics and depressions are due to uncer- 
tainty or disturbance in the confidence of the people, aris- 
ing from some disarrangement in the relation of produc- 
tion to consumption. It is only under modern conditions 
of industry that business to any extent depends upon con- 
fidence and credit. Whoever heard of a financial panic in 
China, India or among the ancients, or in any purely 
agricultural country? The reason for this is that panics 
are due to a sudden shaking of the confidence of people 
in their investments, which are for the time largely re- 
moved from the personal control of the owners ; but, in 
countries where industries are simple and largely agri- 
cultural, investments are not entrusted to others in this 
way. The industries are small and directly managed by 
the owners, there are no complicated financial relations, 
and production is chiefly by hand labor or by very primi- 
tive methods. Under these conditions there is very little 
reliance on credit, and hence rarely a panic. 

Financial panics may come from any alarm which 
causes capitalists and banks to withdraw loans and re- 
fuse to make new ones, or from scarcity of money in lo- 
calities where there is a sudden increased demand for it, 
or from overconfidence and rash investment in specula- 
tive enterprises not sufficiently developed or tested, and 
which soon fail. This latter condition existed at the close 
of the civil war, and led to the panic of 1873, and we were 
dangerously near it again in the fall of 1899 and spring 
of 1900.3. The difference in the two periods was that in 
1873 business conditions were in a declining state, while 
in 1899-1900 business was in a solidly improving condi- 
tion, so that even rash speculations did not bring 
disaster. 

In the last analysis, as already indicated, business de- 
pressions, and usually financial panics, are directly or in- 



PANICS AND DEPRESSIONS 195- 

directly due to an irregular or badly adjusted relation of 
production to consumption. If consumption could be 
made to keep exact and regular pace with production, 
no matter how rapid the increase there would never be 
an industrial depression and seldom a financial panic. The 
failure of general consumption to increase with the 
growth of production is sure to bring on an industrial 
depression. Whenever things are produced and cannot 
be sold, depression sets in. This condition may arise by 
a slackening of demand for the materials and goods used 
in production and trade, due to fear of some sudden 
change in the monetary standard, or in the tariff, or sys- 
tem of taxation, or to prospect of war, etc. This has ex- 
actly the same effect upon industry as a gradual falling 
off in the daily consumption by the people. Both create 
a disturbance in the balance between consumption and 
production, and business depression begins. Orders are 
cancelled or withheld, mills are closed, laborers dis- 
charged, and, in the concerns which do keep on, produc- 
tion is lessened and wages lowered, all of which helps to 
intensify the general hard times. 

io5. How Can These Evils Be Prevented? Since 
panics and industrial depressions did not exist in primi- 
tive society and have come into existence with modern 
industry, it might be assumed that the only remedy is to 
return to early conditions. Such a conclusion assumes 
that these evils are a necessary and unavoidable feature 
of progress. This is a mistake. The remedy for panics 
and depressions is not to return to hand-labor industry, 
but to call upon economic science and statesmanship to 
aid natural laws in providing a better adjustment of con- 
sumption and production, so as to maintain a steady 
balance, both increasing together. 

In order to avoid financial panics, we ought, for one 



196 OUTLINES OF SOCIAL ECONOMICS 

thing, to reform our banking system so that it may yield 
better accommodation for business purposes, and re- 
spond better to sudden waves of demand for loans of 
currency. This would require a much more thorough 
welding together and interdependence among the banks 
of the country, and for that matter of the world, so that 
financial accommodations, like water seeking its level, 
would flow to the point of greatest need, and inequalities 
in the supply of money tend to neutralize each other so 
that the needs of every section could be properly met. 

Business depressions can be made less and less frequent 
by the worldwide extension of means of communication, 
information and transportation. In this way the signs of 
growing or declining demand at any given point can be 
known everywhere, and the world's products dispatched 
from the points of glut to the points of great demand be- 
fore great losses overtake producers in one section and 
excessive prices burden consumers in another. More ac- 
curate knowledge of the conditions of demand and sup- 
ply is necessary, not merely in the locality where any 
given commodities are produced, but in every accessible 
market in the world. In proportion as this knowledge is 
meager and unreliable, it is impossible to adjust produc- 
tion to the market demand. Industrial disturbances re- 
sulting from so-called "overproduction" are very fre- 
quently due to the ignorance of producers concerning the 
conditions of the market and its means of supply. 

Therefore, increase of accurate information as to the 
actual state of consumption and means of supply is one 
of the first conditions of getting rid of industrial de- 
pressions. This can be furnished, very largely, by the 
organization into large concerns of all such industries as 
are adapted to consolidation. Small firms cannot afford 
the expense necessary to procure this kind of informa- 



PANICS AND DEPRESSIONS 1 97 

tion. When the industries whose products supply more 
than a local market are developed to or organized on a 
scale sufficient to warrant the expenditure necessary for 
special regular information, making economic forecasts 
possible, a long step will have been taken towards abol- 
ishing industrial depressions altogether. 

This information in regard to the conditions of con- 
sumption should include all the details of the standard of 
living, tastes, habits, demands, employment, earnings, 
and other conditions, in different countries, which directly 
and indirectly affect the aggregate consumption of prod- 
ucts. Such data should be accurately and frequently col- 
lected, and while large corporations will more and more 
collect it for themselves it is a duty the government 
might well undertake, for the benefit of all industries. 

Public policy should also be directed to stimulating a 
higher, expanding standard of living among the people, 
which leads to a steady increase in consumption and so 
lessens the danger from one of the great causes of busi- 
ness depression. When the balance between production 
and consumption is disturbed it can only be restored in 
one of two ways, either by increasing the consumption as 
compared with the production, or lessening the produc- 
tion as compared with the consumption. 

To increase consumption stimulates industrial life and 
the upward progress of society. To restrict production 
sets all the depressing social forces in action. It creates 
enforced idleness, destroys profits, lessens the value of 
investments, discourages enterprise, and stops the springs 
of optimism, hope, confidence and progressive activity. 

Panics and depressions came with modern industry, 
but are not necessary features of it. They can and will 
be diminished in frequency and intensity, perhaps abol- 
ished entirely. Reform in our money and banking sys- 



198 OUTLINES OF SOCIAL ECONOMICS 

terns, removing all fear of sudden changes and equaliz- 
ing the distribution of money according to business 
needs, and steadiness in the government's tariff and tax- 
ation policies, will remove some of the chief causes of 
panics. Concentration of capital, making production 
more steady and furnishing ample regular information, 
supplemented by government statistics, so that economic 
conditions may be foreseen and prepared for, will do 
much to prevent industrial depressions. Wise public pol- 
icy, in nation, state and city, furnishing ample educa- 
tional opportunities, prohibiting child labor, restricting 
the hours of labor so as to increase the social opportuni- 
ties of the millions, enforcing decent and sanitary housing 
in cities, limiting the immigration of aliens with their de- 
graded standard of living, furnishing clean streets, li- 
braries, public baths and good roads, encouraging the 
diversification of industry as a progressive and socially 
enlivening influence, and in a score of other ways helping 
to raise and improve the standard of living of the people, 
will stimulate the forces that lead to higher wages and so 
to a steadily increasing and diversifying market demand 
for products. Under such conditions, only some severe 
calamity or national folly can bring on a real industrial 
depression. 

SUGGESTED READING. 

In "Principles of Social Economics," Chapter V. of 
Part IV., on "Business Depressions." 

Additional Reference. In Hadley's "Economics," Sec- 
tions 330 to 333 inclusive, in Chapter IX. These sec- 
tions trace the causes and progress of commercial crises 
or industrial depressions. 



PANICS AND DEPRESSIONS 1 99 

QUESTIONS FOR REVIEW OR DEBATE. 

1. Explain the difference between a panic and an industrial de- 

pression. 

2. What is the great general cause at the root of both panics 

and industrial depressions? 

3. What are some of the more immediate causes of financial 

panics? 

4. Mention some of the direct causes of industrial depressions. 

5. Describe one important reform that would help prevent 

financial panics. 

6. How could increased information and transportation reduce 

industrial depressions? 

7. What tendency of industries is most favorable to this greater 

accuracy in knowledge of conditions? 

8. Mention some of the things the government can do to in- 

crease commercial information and stimulate a higher 
standard of living. 

9. How and why would such measures affect industrial de- 

pressions? 



CHAPTER XXIV. 

ARE WE REALLY PROGRESSING? 

106. The Test of Progress. Before attempting to 
answer the question, whether or not we are really pro- 
gressing, we must recall what is meant by progress. In 
general it means changing to a more complex condition. 
Progress in horticulture is the development of new and 
varied forms of plant life. Progress in society is the de- 
velopment of a greater variety of desires, habits, experi- 
ences and activities, and this always involves a greater 
quantity of wealth and greater variety in its forms and 
uses. This greater variety, reaching into every phase of 
the use of wealth, of social life, and multiplying indi- 
vidual rights and activities, is the evidence of progress. 

It can hardly ever be said that there is real progress 
in a community unless there is an increase of the wealth 
produced, diversification of industries and employments, 
and a greater distribution of the increasing wealth among 
all classes of the people, resulting in their general social 
and individual improvement. Judged by this standard, 
are we in the United States really progressing? This 
question is one upon which volumes have been and can 
be written, and at most we can only mention a few leading 
considerations bearing on the material and social welfare 
of the nation. 

107. Population and Wealth.* In i860 the popula- 



*These statistics are taken from the United States Census 
Reports. 

200 



ARE WE REALLY PROGRESSING? 201 

tion of the United States was 31,443,321. The invest- 
ment of capital in manufacturing and mechanical indus- 
tries was $1,009,855,715, or $32.11 per capita of the pop- 
ulation, and the value of the total product was $1,885,- 
861,676, or $59.98 per capita. In 1890 the population of 
the country was 62,622,250. The capital invested in man- 
ufacturing and mechanical industries was $6,525,156,486, 
or $104.19 per capita, and the value of the product was 
$9,372,437,283, or $149.67 per capita. This was an in- 
crease in the total capital invested in these industries of 
546 per cent., or 224 per cent, per capita, and an increase 
of 397 per cent, in the total product, or 149 per cent, in- 
crease of product per capita. Statistics of agricultural, 
mineral and fishery products were not included in the 
census of i860, but in 1890 these were: agricultural 
products, $2,460,107,454; mineral, $587,230,662 ; fishery, 
$44,277,514. The products of manufacturing and mer- 
cantile industries in 1890 were valued at $9,372,437,283, 
as before stated; deducting the $5,021,453,326 worth of 
materials used, we have $4,350,983,957 as the value 
strictly due to the manufacturing process applied to 
products, and adding to this the value of agricultural, 
mineral and fishery products, we have a grand total of 
production in 1890 of $7,442,599,587. This is a total per 
capita product in 1890 of $118.85, or $585.93 per average 
family of 4.93 persons. Of course, this is no indication 
of what the actual income per family was ; this varied 
from a mere pittance on the part of some to the immense 
incomes of the very rich, but the great majority, espe- 
cially the wage-earning class, earn incomes which do not 
widely vary from this general average of production, be- 
ing, on the whole, necessarily, somewhat under it. The 
actual distribution of the wealth produced is roughly in- 
dicated by the movement of prices and wages. 



202 OUTLINES OF SOCIAL ECONOMICS 

108. Prices and Wages. * The products of practi- 
cally, all manufacturing industries, especially those in 
which large capital is invested, have fallen in price since 
i860; but in some other industries, notably agriculture, 
products like beef, mutton, chickens, eggs, butter, fruits, 
etc., have tended to increase in price. Taking all prod- 
ucts together, and grouping them according to their im- 
portance in general consumption, prices fell from i860 to 
1 89 1 a trifle less than 4 per cent. That is to say, a dollar 
would buy about 4 per cent, more of the total products 
consumed by the people in 1891 than it would in i860; 
so that, so far as general prices are concerned, all con- 
sumers, rich and poor, fared alike in getting 4 per cent, 
gain. 

During this same period money wages, as nearly as 
they can be ascertained, and properly averaged according 
to importance of employments, rose about 68 per cent. If 
we carry the comparison back to 1840, the increase in 
wages is more than 85 per cent. Confining ourselves to 
the period since i860, if we add to the wage average of 
1 89 1 the 4 per cent, increase in the purchasing power of 
a dollar, we find that the average American laborer was 
able to obtain for a day's work about 75 per cent, more 
than in i860. That is to say, every day's wages would 
buy 75 per cent, more of food, clothing, shelter and sun- 
dries in 1890 than it would in i860. In other words, 
during this period, as the laborer's part of the nation's 
increased production, his command over the necessaries 
of life and means of social welfare increased at the rate 
of 25 per cent, every ten years. 

109. Hours of Labor. The question may well be 



* The statistics given as to prices and wages are taken from the 
U. S. Senate Report of 1893 on Wholesale Prices, Wages and 
Transportation. 



ARE WE REALLY PROGRESSING? 203 

asked in this connection, does the laborer work harder or 
longer to get the larger amount he earns to-day than he 
did to obtain the smaller amount in i860? The answer 
is, no. The tendency during this whole period has been 
to lessen the tax upon the laborer's time and increase the 
proportion of leisure. In i860 the rule in practically all 
manufacturing industries in this country was to work 
twelve hours a day. Beginning in Massachusetts in 1874, 
the hours of labor in manufacturing, mining and trans- 
portation industries, and of practically all common labor 
in manufacturing centers, have been reduced — in some 
cases by law and in others by the efforts of trade unions — 
to about ten hours, and in a number of special industries 
to nine and eight hours. For instance, machinists and 
the building trades in most large cities have nine hours, 
and, in some of the largest cities, eight hours a day. 
Miners almost uniformly work only eight hours a day. 
The factory operatives in Massachusetts work only 58, 
and in New Jersey 55 hours a week. Speaking generally, 
since i860 the hours of labor have been reduced by from 
two to four hours a day. Thus, the earning power of a 
day's work has increased about 75 per cent., and the 
working hours have been reduced by from fifteen to 
twenty-five and thirty per cent. In other words, the 
wage-earner can obtain practically three-quarters more 
wealth by working one-fifth less time, as compared with 
i860. 

no. Education for Factory Children. In popular 
education, which is so important a feature of social im- 
provement, the progress has been equally marked. In 
i860 there were no legal limits fixed to the age at which 
children should commence work in factories, any more 
than to the length of the working day. But during the 
last twenty-five years there has been a more or less 



204 OUTLINES OF SOCIAL ECONOMICS 

steady movement in all the states, with the exception of 
the South, to introduce compulsory education for chil- 
dren under a certain age, especially affecting those work- 
ing in shops and factories. In this, as in all legislation 
of the kind, Massachusetts was again in the lead, and 
most of the states in the North and East where manufac- 
turing industries exist have followed. Besides legally 
limiting the hours of labor to ten or less, the age limit for 
working children has been gradually raised, and their at- 
tendance at school during at least a certain number of 
months in the year has been made compulsory. In some 
instances the age limit at first was made ten years; it 
has been gradually raised until it is now fourteen in most 
cases, and in some states, including New York, it is six- 
teen years, unless the young person is able to read and 
write. 

In the South no laws of this character have been 
adopted, but a movement demanding child-labor legisla- 
tion has begun in earnest. 

in. "Truck System" Abolished. Besides the long 
hours and lack of educational opportunities in i860, and 
for a long time afterwards, workingmen labored under 
many other disadvantages. For instance, they were paid 
very largely in "store orders;" that is, the corporations 
owned stores supplying various commodities, and the la- 
borers were practically compelled to purchase their goods 
at the corporation store. If ever they wished to go else- 
where to buy goods they had to use these orders and 
submit to a discount on them. This was called the "truck 
system." It prevailed throughout New England, as it did 
in the early part of the century in old England. Laborers 
were seldom paid, even in store orders, more often than 
once a month. With a few exceptions, this practice is 
now abolished. In most cases it has been prohibited by 



ARE WE REALLY PROGRESSING? 205 

laws providing that laborers must be paid in full legal 
money and be at liberty to make their purchases whereso- 
ever they please. In several states, also, laws have been 
enacted compelling employers to pay laborers at least 
every two weeks ; in some cases, every week. 

112. Sanitation and Homes. In the matter of home 
appointments and sanitation the improvement has been 
very great, although much remains to be done, especially 
in cities. Forty years ago there were practically no sani- 
tary appliances connected with the laborers' homes, ex- 
cept what gravitation provided. The community had 
done almost nothing to insure wholesome conditions. 
Cities were badly drained, poorly lighted, and as a rule 
inadequately furnished with water supply. Since that 
time sanitary science has made marked progress, and 
through legislation and boards of health numerous mod- 
ern improvements have been applied to the dwellings of 
the laboring class in most of the large cities. Builders 
are now rarely permitted to erect houses without modern 
provisions for ventilation, light, sanitary plumbing and 
conveniences, proper water supply, etc., and these require- 
ments are gradually being made more comprehensive and 
strict. Not many years ago the bathroom was the luxury 
only of the rich ; it is now rapidly becoming a common- 
place necessity of the laborers' tenements. 

113. Individual Betterment. Concurrently with these 
various movements has come a greater degree of per- 
sonal freedom and individual character, a relative de- 
crease of pauperism and of serious crimes, and a gen- 
erally recognized higher standard of civilization. 

The evidences and statistics on all the manifold phases 
of this subject are so voluminous that we can do little 
more than summarize the leading facts and state the gen- 
eral conclusions. In verifying these, reference should be 



206 OUTLINES OF SOCIAL ECONOMICS 

made to standard, recognized statistical authorities and 
competent students of industrial, social and moral prog- 
ress. Some of these, the most easily accessible, we have 
indicated in the suggestions for reading in connection 
with this chapter. 

114. Duty of the Future. Encouraging as the evi- 
dences of progress are, they should not by any means 
lull us into indifference and neglect of the grave evils that 
still remain. We must deal with these and with the new 
problems that progress is constantly developing, vig- 
orously, persistently, and if necessary by new methods 
adapted to the new conditions. There is hardly any feature 
of our national life which has not the possibilities of being, 
on the one hand, perverted, abused and converted into a 
menace to our freedom and progress, and, on the other 
hand, of serving public welfare and becoming a source 
of strength and prosperity to the republic. To prevent 
the former and secure the latter results demands constant 
watchfulness, study and willingness to help on the part 
of every citizen. The natural evolution of industry may 
be trusted to bring us an increasing measure of material 
well-being, but to secure the good results which this is 
capable of yielding we must jealously watch the social 
consequences of every new step. Increase of wealth, if it 
is to be of any real utility to mankind, must be accom- 
panied by a constant broadening of the opportunities for 
using it, and an increasing variety of higher and finer in- 
centives to use it wisely and well. Production and wages 
will increase, but the hours of labor must be still further 
shortened, the age-limit of child labor must be still further 
raised, educational opportunities must be extended and 
the methods broadened and improved, city tenements 
must be made more healthful and decent, the wage-earn- 
ing class must be protected against the pitiable effects of 



ARE WE REALLY PROGRESSING? 207 

accidents, sickness and old-age poverty by some auto- 
matic and general system of labor insurance, systems of 
taxation and finance require scientific remodelling, meth- 
ods of dealing with crime and vagrancy demand far more 
thorough development, and, in general, society must be 
protected against dangerous and down-dragging in- 
fluences, while encouragement is given to all that minis- 
ters to a higher standard and quality of life. If progress 
is to be genuine, industrial and social forces must supple- 
ment the efforts of the church and all wholesome moral 
agencies for that ultimate and highest object of all 
progress, — the development of individual character. 

SUGGESTED READING. 

In "Principles of Social Economics," the "Summary 
and Conclusion," in which special emphasis is laid on 
the character of social progress and duties of statesman- 
ship. 

Additional References. In Marshall's "Economics of 
Industry," Chapter XII. of Book VI., on "The Influence 
of Progress on Value." 

In Carroll D. Wright's "Outline of Practical Sociolo- 
gy," Parts VI. and VII., on "Social Well-Being" and 
"The Defence of Society," respectively; these portions 
discuss the accumulation and distribution of wealth, the 
problem of poverty, crime and its punishment, the tem- 
perance question, and the relation of art to progress. 
The whole volume will be found useful for reference 
purposes, as will also the same author's "Industrial Evo- 
lution of the United States," which summarizes the his- 
tory and statistics of our industrial progress from co- 
lonial times to the present day. 

In Franklin H. Gidding's "Elements of Sociology," 



208 OUTLINES OF SOCIAL ECONOMICS 

Chapter XXIII., on "Progress." Other chapters, espe- 
cially those on "Civilization," "Democracy," "The Char- 
acter and Efficiency of Organization," "The Early His- 
tory of Society," and "Tribal Society," throw additional 
light on various phases of the problem of progress. 

In "Social Peace : A Study of the Trade-Union Move- 
ment in England," by G. von Schulze-Gaevernitz, Chap- 
ter XVII. , which is the "Conclusion" and marshals an 
array of considerations indicating improvement in the 
condition of the masses. 

In William Edward Hearn's "Plutology: or the The- 
ory of the Efforts to Satisfy Human Wants," Chapter 
XXIV., treating "Of Some Causes of Poverty." 

In "The Forum" for July, 1900, article on : "Is Crime 
Increasing?" by Roland P. Falkner. 

For statistics of industrial progress in the United 
States the most complete sources of authority are the 
government census reports and the Senate Report of 
1893 on Prices, Wages and Transportation. Data on 
nearly every important phase of the progress of industry 
and labor in England may be found in Gibbins' "Industry 
in England," or the same author's smaller volume "Indus- 
trial History of England ;" Sir Robert Giffen's "Progress 
of the Working Classes in the Last Half Century ;" Mal- 
lock's "Labour and the Popular Welfare," and the same 
author's "Classes and Masses." For general data, includ- 
ing all nations, the most convenient and probably most 
accurate authorities are the "Statesman's Year Book" 
and Mulhall's "Industries and Wealth of Nations." An 
interesting review of political progress in Europe and 
America is given in Frederick May Holland's "Liberty in 
the Nineteenth Century." Information as to the pub- 
lishers, prices, etc., of these works, as of all others re- 
ferred to in this volume, is given in the Appendix. 



ARE WE REALLY PROGRESSING? 209 

EXTRACTS FROM READINGS. 

Moral Progress a Fact. "Acts which are now justly 
regarded as heinous offences were once considered either 
legitimate or at least venial. Piracy was in early Greece 
a recognized and honorable occupation. The only form 
of dishonesty noticed in the ancient Roman law was 
theft. Our own ancestors established a tariff for homi- 
cide. The morality of the present day is manifestly some- 
thing different from that which such a state of law repre- 
sents. The very shock that the perpetration of these 
great crimes and frauds now gives us is evidence that an 
opposite course of conduct generally prevails. If the gen- 
erality of men had not been peaceable and honest, these 
offenders would have had no opportunity for their iniqui- 
ties. It is the nature of the human intellect, as Lord 
Bacon has observed, to be affected with what is affirma- 
tive and positive rather than with what is negative and 
privative. We are therefore struck with some glaring 
but exceptional offence, and the countless multitude of 
just and honorable dealings remains unnoticed. How nu- 
merous such dealings are, and what a tendencv there is in 
an industrial community to their increase is manifest." — 
From Hearn's "Plutology," Chapter XXIV. 

All Classes Are' Growing Richer. "The assertion that 
the rich are growing richer and the poor poorer is a wan- 
dering phrase, without paternity or date; it is not au- 
thority but familiarity that has given it weight. . . . To the 
investigator the real statement should be: The rich are 
growing richer; many more people than formerly are 
growing rich; and the poor are growing better off. If 
the sum total of wealth were stationary, any increase in 
the wealth of the rich would be an exploitation of the 
poor, and then it would be true that the poor are in 



2IO OUTLINES OF SOCIAL ECONOMICS 

poorer circumstances than formerly. But the sum total 
of wealth is not stationary ; it increases with great rapidi- 
ty, and while under this increase the capitalistic side se- 
cures a greater relative advantage than the wage-earner 
of the profits of production, the wage-earner secures an 
advantage which means the improvement of his condi- 
tion. ... It can be demonstrated that the condition 
of the poor man is improving, and that his share is rela- 
tively greater than under previous systems, and we know 
that the proportion of the skilled workers of the com- 
munity and of those engaged in the higher classes of em- 
ployment is constantly increasing." — From Wright's 
"Outline of Practical Sociology," Chapter XX. 

QUESTIONS FOR REVIEW OR DEBATE. 

i. What is the primary test of progress? 

2. Compared with the growth in population, how much did 

the production of wealth in manufacturing and mercan- 
tile industries in this country increase between i860 and 
1890? 

3. What do statistics show as to the increase in wages and 

decline in prices between i860 and 1890? 

4. What changes have taken place with reference to hours of 

labor since i860? 

5. What progress has been made in regard to restriction of 

child-labor and compulsory education? 

6. Describe the "truck system;" to what extent does it pre- 

vail as compared with a generation ago? 

7. What movement has been and is going on with reference 

to the sanitation and improvement of city houses? 

8. Considering all these evidences of progress, why is con- 

stant watchfulness and reform effort still necessary? 

9. Mention some of the great reforms that ought next to be 

accomplished. 



APPENDIX 



INFORMATION CONCERNING BOOKS REFERRED TO IN 



THE TEXT 



Banks, Louis Albert. "My Young Man." Funk & Wagnalls 
Co., New York. 75 cents. 

Brassey, Sir Thomas. "Work and Wages." G. P. Putnam's 
Sons, New York. $1. 

Brentano, Lujo, of University of Leipsic. "The Relation of 
Labor to the Law of To-Day." G. P. Putnam's Sons, New 
York. $1.75. 

Buckle, Henry T. "History of Civilization in England." Ap- 
pleton & Co., New York. Two vols., $4. 

Butler, Nicholas Murray, of Columbia University. Address 
on "The Education of Public Opinion." Pamphlet pub- 
lished by University of Michigan, Ann Arbor, Mich. 

Clark, John Bates, of Columbia University. "The Philosophy of 
Wealth." Ginn & Co., Boston. $1.10. 

Dunbar, Charles F., of Harvard University. "Theory and His- 
tory of Banking." G. P. Putnam's Sons, New York. $1.00. 

Falkner, Roland P., of University of Pennsylvania. Article 
on: "Is Crime Increasing?" July 1900 number of The Forum, 
New York. 35 cents. 

George, Henry. "Progress and Poverty." Appleton & Co. New 
York. $1. 

Gibbins, H. deB. "Industrial History of England." Chas. 
Scribner's Sons, New York. $1.20. 
"Industry in England." (Scribner's), $2.50. 

Giddings, Franklin H., of Columbia University. "Elements of 
Sociology." Macmillan Co., New York. $1.10. 



*Any of these books may be ordered, if preferred, from the Institute of So- 
cial Economics, Union Square, New York. 

211 



2 12 APPENDIX 

Giffen, Sir Robert. "Progress of the Working Classes in the 
Last Half Century." Pamphlet, order through the Macmil- 
lan Co. , New York. 

Gilman, Nicholas P., of Meadville Theological School. "A 
Dividend to Labor." Houghton, Mifflin & Co., Boston. $1.50. 

Graham, William, of Queen's College, Belfast. "Socialism, 
New and Old." Appleton & Co., New York. $1.75. 

Gunton, George,* President Institute of Social Economics. 
"Principles of Social Economics." G. P. Putnam's Sons, 
New York, $1.75. 

"Wealth and Progress." Appleton & Co., New York. $1. 
"Trusts and the Public." (Appleton's.) $1. 
"Economic Basis of Socialism." Ginn & Co. Boston. 

Pamphlet, 10 cents. 
"Economic Heresies of Henry George." Article reprinted 
from The Forum in pamphlet form; 10 cents. 

Hadley, Arthur T., President Yale University. "Economics," 
G. P. Putnam's Sons, New York. $2.50. 
"Railroad Transportation; Its History and Its Laws." 
(Putnam's.) $1.50. 

Harris, George, President Amherst College. "Inequality and 
Progress." Houghton, Mifflin & Co., Boston. $1.25. 

Hearn, William Edward. "Plutology; or the Theory of the 
Efforts to Satisfy Human Wants." Originally published by 
the Macmillan Co., New York, but now out of print. Large 
libraries may have it. 

Holland, Frederick May. "Liberty in the Nineteenth Century." 
G. P. Putnam's Sons, New York. $1.75. 

Howell, George. "The Conflicts of Capital and Labor." Mac- 
millan Co., New York. $2.50. 

Lubbock, Sir John. "Origin of Civilization." Appleton & Co., 
New York. New and enlarged edition, $5. 

Mallock, William H. "Classes and Masses." Macmillan Co., 
New York. $1.25. 
"Labour and the Popular Welfare." Macmillan's. $1.25. 

Marshall, Alfred, of the University of Cambridge. "Economics 
of Industry." Macmillan Co., New York. $1. 

Mill, John Stuart. "Principles of Political Economy." Apple- 
ton & Co., New York. Complete, 2 vols., $4; abridged edi- 
tion, $3.50. One-volume edition also published by Long- 
mans, Green & Co., New York, at $1.25. 



APPENDIX 2 13 

Mulhall, Michael G. "Industries and Wealth of Nations." 
Longmans, Green & Co., New York. $3. 

Ricardo, David. "Principles of Political -Economy and Taxa- 
tion." Macmillan Co., New York. $1.50. 

Rae, John. "Contemporary Socialism." Chas. Scribner's Sons, 
New York. $2.50. 

Schulze-Gaevernitz, G. von. "Social Peace : A Study of the 
Trade-Union Movement in England." Chas. Scribner's Sons, 
New York. $1.25. 

Schloss, David F. "Methods of Industrial Remuneration." G. 
P. Putnam's Sons, New York. $2.50. 

Seligman, Edwin R. A., of Columbia University. "Essays on 
Taxation." Macmillan Co., New York. $3. 

Smith, Adam. "Wealth of Nations." G. P. Putnam's Sons, 
New York. $1.25. 

Starr, Frederick, of the University of Chicago. "Some First 
Steps in Human Progress." Curts & Jennings, Cincinnati. 

Statesman's Year Book. Historical and Statistical Annual of 
the World. Edited by J. Scott Keltic Macmillan Co., New 
York. Issued annually, $3. 

U. S. Census Reports. In most libraries ; not for sale. 

U. S. Senate Report of 1893 on Prices, Wages and Transpor- 
tation. In many libraries ; not for sale. 

Walker, Francis A. "The Wages Question." Henry Holt & 
Co., New York. $3.50. 
"Land and Its Rent." Little, Brown & Co., Boston. 75 cents. 

Webb, Sidney and Beatrice. "History of Trade-Unionism." 
Longmans, Green & Co., New York. $5. 

Wood, Henry. "The Political Economy of Natural Law." Lee 
& Shepard, Boston. $1.25. 

Wright, Carroll D. "Outline of Practical Sociology." Long- 
mans, Green & Co., New York. $2. 

"Industrial Evolution of the United States." Chas. Scrib- 
ner's Sons, New York. $1.25. 



INDEX 



Agricultural life, beginnings of to 

Anarchism 141 

Arkwright's spinning frame 11 

Banking, factor in exchange 49, 52 

— better system of . 196 

Bellamy, Edward; " Looking Backward," 139 

Barter . . . 47 

Business depressions (see Panics) 

Capital, what it is 18, 36 

— (see Corporations) 

Capitalistic production . , 39 

Cartwright's power loom 11 

Character, effect of socialism on 147, 149 

— (see Individual Betterment) 

Charity, effect on wages 90 

Children, factory: education of 203 

Citizens, good and bad 5 

Citizenship, duties of 206 

Communism 141 

Competition, effect of 73, 121 

Consumption, object of 55, 60 

— productive consumption 58, 60 

— public and private 56 

— social effects of 56 

— statistics of 196 

— useful and wasteful 58 

Cooperation, experiments in . . - 145, 146, 167, 174 

— success of mercantile 168 

— what it is 166 

Corporations, effect on production . 42, 45 

— business depressions and 196 

Cost, of production 67, 70, 71, 75 

— of utilizing land 157 

Credit, an instrument of exchange . . 49 

Crompton's "mule frame" 11 

Depressions (see Panics) 

Desires, cause of production 29 

— effect on wages 88 

— (see Habits) 

214 



INDEX 2 I 5 

Economic education, need of 6, 181, igo 

Economics, early meaning of i 

— (see Social Economics) 

Education, effect on production 31 

— of factory children 203 

Equality not feasible 149 

Exchange, beginnings of 47 

Factory methods 39 

Factory system, rise of 12 

Family, basis of wage rates 98 

Family life, origin of 1, 7 

George, Henry 154, 164 

Groups, earliest social 1, 7 

— laborers must act in . . 176 

— wages fixed by 99, 187 

Habits, effect on production 30 

— effect on wages 88 

— (see Desires) 

Hargreaves' spinning jenny n 

Immigrants, wages of 101 

Individual betterment 205 

— (see Progress) 
Individualism (see Liberty) 

Industrial life, social effects of 9, 12 

Industrial revolution, The 11 

Interest, how determined 114, 117 

— how it arises 113 

— is not a tax 115 

— similar to rent 112 

— what it is 82 

Labor, cheap labor is dearest 76 

— distinct from wealth 18 

— division of 37 

— does not produce all wealth 129 

— education of 181, 190 

— effects of machinery on 40, 45 

— factor in production 36 

— hand-labor era 37 

— hours of 202 

— its share in production 131, 136 

— legislation for . . 179 

— organizations of (see Trade Unions) 

Land, factor in production 37 

— cost of utilizing 157 

— value of 155 



2l6 INDEX 



Liberty, growth of 8, 133 

— preservation of 141, 149, 150 

— trade unions and 183 

Lubbock, Sir John .... 8 

Luxuries not wasted wealth ^8 



Machinery, effects on labor . , 40, 45, 95 

Manufacture, beginnings of • . . . . 10, 38, 44 

Middlemen, necessity of 51 

Mill, John Stuart 18, 25 

Money, convenience of coins 49 

— first use of 48 

Nature, agent in production 36 

Occupations, social effects of . 9, 12 

Panics, causes of 193 

— remedies for 195 

Pastoral life 10 

Personal qualities not wealth 18, 22 

Piece-work, wages under 94, 95 

Point of view in economics 3 

Political economy, first use of 1 

— (see Social Economics) 

Politics, character of 2 

Poverty, relative decrease of 136, 140, 201, 209 

— single tax could not abolish 160 

Price (see Value) 

Prices, decline of 202 

— single tax and 161 

Production, capitalistic . . 39 

-—causes of 29-31 

— cheap and dear 75 

— cost of 67, 70-72, 75 

— effect of high wages on 32 

— factors in 36 

— former ideas of 24 

— limited by market 36 

— meaning of 24, 27 

Profits, distribution of 122, 125 

— how they arise 7 r 

— necessary to progress 120 

— no average rate . 119 

— not a tax 123 

— restore spent capital 126 

— what they are 83, 119 

Profit-sharing . , 171, 173 



RB a a f 



INDEX 2 17 

Progress, causes of 9 

— promotion of 206 

— statistics of 200-205, 209 

— successive steps in 133, 140, 147, 163 

— test of 200 

— what it is 8 

Public ownership 133, 142, 150 

Public policy, test of 4 

Rent, does not absorb all gain 158 

— how determined 105 

— not a tax 108, 109 

— nominal and economic 105 

— what it is 82 

Sanitation, progress in 205 

Savage life , . 13 

Sentiments (see Habits) 

Single tax, errors of 109, 154, 157, 158, 160, 163, 164 

— immorality of 159 

—theory of ... 154 

Smith, Adam 1, 18, 24 

Socialism, different from anarchism and communism . . . 141 

— economic effects of = . . 143, 150 

—effects on individual life 147, 149 

— experiments in , . ... 145, 146, 167, 174 

— history of 132 

— proposed methods of 135, 142 

—theory of 128, 129, 131 

— what it promises 139 

Social economics, meaning of 1, 4 

— point of view of 3 

— what it includes 2, 3 

Standard of living . • 87, 98, 197 

Statesmanship, duties of 197, 198, 206 

Supply and demand, theory of 64 

Surplus not part of cost 7° 

Towns, early English 14 15 

—rise of 11 

Trade unions, advantages of 182, 186, 189 

— economic character of 185 

—federation of 181,185, 188 

— individual liberty and 183 

— in England 177 

—in the^United States •••.-. 180 

— mistakes and needs of 188 

—objects of 176, 185 

Transportation, part of production 50 

—in the United States 53 



2l8 INDEX 



"Truck system" 204 

Trusts (see Corporations) 

Utility, different from value 63 

" Utopia," Sir Thomas More's I3q 

Value, fixed by cost of production 67, 72, 78, 79 

— of land 155 

— requirements of law of 66 

— same as price ' . . 62 

— utility and 63, 68 

Variety, and progress 10, 12, 29 

— (see Progress) 

Wages, country and city 99 

— effect on production 32 

— fixed by standard of living 87, 98; of groups 99 

— index of civilization 87 

— influences that affect 88, 90 

— low wages dearest 76 

— of immigrants 101 

— profit-sharing and 171 

— real and nominal 86 

— rise of 202 

— single tax and 161 

— taxes on 102, 103 

— under piece-work 95 

— what they are 81 

— women's wages , 0/ 

Wages-fund a myth 92 

Wants (see Desires) 

Watt's steam engine 12 

Wealth, consumption of 55 

— distinct from man 18 

1 — distribution of 81, 131 

— kinds of . . . .■ 17 

— labor does not produce all 129 

— production of 24, 29, 36, 47 

—what it is 17, 21 



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